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How Long Does The IRS Have To Audit My Tax Returns

How Long Does The IRS Have To Audit My Tax Returns

When you complete a tax return for the IRS and receive your refund, a lot of people think they are in the clear. However, this is not the case when it comes to the IRS and its auditing practices. The revenue service now has the power to expand their auditing limitation to six years, instead of the previous three year rule. This happens only in cases where 25 percent or more of a person’s income was left out when they were filing their tax returns.

Let us look at an example of what it means to inaccurately report your income to the IRS. If you have a property that sold for around $2 million, you report to the IRS that the amount you invested in the property was $1 million. This means you are claiming tax on a gain of $1 million. However, the IRS might find that you actually paid only $500,000 for this property. In that case, you had to pay taxes on $1.5 million of profit, not $1 million, resulting in non-reporting of $1 million. If this amount totaled more than 25 percent of your income for the year, you could face back taxes anytime in the next six years.

There are even cases where the IRS goes back 20 or 30 years for collections. But those cases only involve individuals or companies who under-report their taxes by a significant margin and do so by omitting tax forms entirely.

The scary part about these IRS rules involves the chance of honest mistakes. Perhaps you genuinely wrote down in your records that you paid a certain amount for the property you flipped. If those records were incorrect, you accidentally under-reported your tax, which the IRS goes after very seriously. Some cases also involve the IRS sending a request to the person in question for more time to complete their audit. This period usually lasts a year or two. In some cases, individuals are told by their attorneys to comply with the IRS. However, every case is different and it is important to get the opinion of a qualified tax attorney before you take any further steps.

With so many people investing their money overseas, the IRS is also taking the matter of those accounts very seriously. If someone omits even a little bit of their income from those overseas accounts ($5,000 or more), the IRS has six years to file collections claims on those funds. In addition, the penalties for such situations are a lot worse than basic tax under-reporting.