Supreme Court to Decide on Tax Audit Statute of Limitations

By Ken Berry

The Supreme Court has decided to review Home Concrete & Supply, LLC v. United States, No. 09-2353 (4th Cir. Feb. 7, 2011), involving the statute of limitations on federal income tax deficiencies. Crux of the matter: Can the Internal Revenue Service (IRS) go as far back as six years to audit taxpayers, or is it limited to a three-year period?

The outcome will be significant to both taxpayers and the professional tax community. Essentially, it may reduce extended exposure to audits in certain situations.

The basic rules aren't in dispute. Generally, the IRS can assess taxes within three years of the original due date of the tax return. It doesn't matter if the tax return was filed before the due date. If a return is filed late without an extension, the statute runs three years following the actual (late) filing date.

Are you subscribed to AccountingWEB newsletters? Click here to sign up for free.

But the usual three-year period is doubled to six years for a "substantial understatement of income." For this purpose, a substantial understatement is an omission of 25 percent or more of income. The IRS has argued that any claim that effectively results in an omission of 25 percent or more of tax liability – such as using an inflated tax basis – adds an extra three years to the ticking clock.

Example: A taxpayer sells a piece of property for $3 million, claiming a basis of $1.5 million. In reality, the basis was only $500,000. The effect of the basis overstatement is that the taxpayer paid tax on $1.5 million of gain when the taxpayer should have paid tax on $2.5 million. The IRS argues that this is a substantial understatement that can trigger the six-year audit period.

In recent years, the lower courts have been divided on whether the IRS can go back six years to audit a return with a basis understatement or if the three-year rule applies. Now, the Supreme Court has agreed to settle the matter once and for all. The government’s opening brief on Home Concrete & Supply, LLC v. U.S. is due November 14, and it will likely be January or February before arguments are heard. A decision will be later still.

At least one thing is clear at this point: There is no statute of limitations where fraud is committed. The IRS can go back indefinitely to examine the worst tax cheats.

 

You may like these other stories...

Boehner addresses GOP priorities ahead of midterm electionsHouse Speaker John Boehner (R-OH) on Thursday delivered what amounted to closing arguments ahead of the November elections, laying out a list of Republican...
As anyone who's ever been through a divorce can attest, the pain of parting with your spouse isn't just emotional—the fallout from divorce can wreak financial havoc as well long after the dust in the courtroom...
Former DOJ Tax Division head Kathryn Keneally joining DLA Piper in New YorkGlobal law firm DLA Piper announced on Thursday that Kathryn Keneally, the former head of the US Justice Department Tax Division, is joining the firm...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.