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What Is the Time Window for IRS Audits?

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Usually, the IRS has three years to examine the personal returns of taxpayers and impose deficiencies and penalties and interest. However, in certain situations, it can go back even further as witnessed in a new Tax Court case.

Aug 5th 2021
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In a new case, Pragrias TC Memo 2021-82, 6/30/21, the Tax Court allowed the IRS to go past the usual three years for an audit due to a substantial understatement of taxable income.

Details: The basic statute of limitations for IRS examinations is three years from the due date of your federal tax return. For example, if your return was due on April 15, 2021, but you filed it on March 1, 2021, the IRS has until April 15, 2024 to examine your return.

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However, the statute of limitations is doubled to six years if your return includes a “substantial understatement of income.” Generally, this means you have omitted more than 25 percent of your taxable income. Suppose you earned $200,000 but reported only $125,000 in earnings. Because you omitted more than 25 percent of the income, you can be audited for up to six years.

Finally, if you never filed a return for a particular tax year or the return was fraudulent (or fraud is suspected), there is no time limit. The IRS can back as long as it likes.

The taxpayer in the new case tried to avoid tax liability on a technicality. He claimed that his understatement of tax was not an omission, so the statute of limitations should only be three years.

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