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IRS audit

IRS Audit – How far back can you be audited?

IRS Audit Representation

Have you ever wondered how long you should keep tax return documents, just in case the IRS decides to audit it? Even if you do your best with your taxes, taxes are horribly complex.  It is good to know laws that set time limits on IRS audits.

Under the Internal Revenue Code, Section 6501 provides the statute of limitations on IRS audit. It varies depending upon the circumstances of the tax return.  Generally, IRS will not go back more than 3 years unless there is something very wrong with the tax return that was filed.

The statute of limitations starts on the original due date of the tax return.  If the tax return was filed prior to the due date it doesn’t matter, the statute of limitations starts on April 15th of the year that the tax return was due.  It’s important to note that filing a tax return on extension has the downside of also extending the time your return is subject to an audit.  So, if you filed your 2013 tax return on April 15, 2014then the IRS would have time until April 15, 2017, to audit it.  However, if you had requested an automatic extension and filed tax return on Oct 15, 2014 then the IRS still has time until Oct. 15, 2017, to audit your return and assess any additional tax and penalties due.

Below are the three different time frames and descriptions of when each applies for the IRS to audit your tax return.

3 Year Period: This is the standard amount of time that the IRS has to legally audit most tax returns.  This is the time period that applies if you do not fall into any of the two categories listed below.

6 Year Period: If the income on the tax return was understated income by 25% or more the statute of limitations to audit the return can be extended by another 3 years.  It is really worth noting that the IRS doesn’t consider any amount as omitted from gross income if you disclose it in the tax return, or in a statement attached to it, and you do it in a manner that’s adequate for the IRS to appraise the nature and amount of the item.  So, in case you used an estimated cost basis to reduce the capital gains income on the sale of property.  However, you disclosed this and the possible lower cost basis on a written statement, the IRS would have only three years to audit that tax return.

Unlimited Time Period: If the tax return was filed with the purpose to commit fraud then the statute of limitations may be prolonged to all the time.  There may be a great line between fraud and negligence and this best applies to tax fraud.  The IRS ought to show fraud in those forms of cases and generally will most effective do that if a variety of money is concerned or it is an excessive profile tax case.

How far back can you be audited

IRS Audit Group attorneys are extremely passionate about helping people, and at IAG we are dedicated to resolving your IRS tax issues.  Our tax attorneys take pride in being accessible, efficient, and responsive.

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Top Seven Warning Signs That Can Initiate a Tax Audit by IRS

IRS Audit Tips

In general, no one really wants to be audited by the Internal Revenue Service (IRS) and to be frank, it’s a problem. There are chances of getting audited as the income level increases as well. It is better to play safe to avoid the burden and stress of an IRS audit.

Here is a summary of the reasons for getting audited

– Annual income
– Exclusion of income while filing returns
– Deductions claimed based on total income

In order to stay out of this IRS auditing, it is prudent to look into a few red flags (warning signs) which you take note of as follows;

Earning income from multiple sources

When you have multiple sources of income, say you are a freelancer, it may turn out for you hard to maintain all of the income year earned, and the much more likely you’re to leave out a payment. Any organization you work for is required to send the IRS copies of all 1099s and W-2 forms you receive. If the income you record doesn’t line up with those forms, that mismatch IRS will trigger at least a letter audit.
Unreported Income
Unreported income is a huge deal to the IRS. According to a recent IRS report, U.S loses hundreds of billions per year in taxes due to unreported income. So if you fail to showcase those earnings, the IRS will ask explanations.

Running own business

The IRS always have an impression that they can find more the unpaid tax from those who run own business. It’s always better to keep a good track of records if you are running own business. It is advisable to maintain in-depth reports, which consists of business associated receipts regarding purchase etc. in a good categorized manner is a must when filing the returns.

Foreign Accounts & Assets

If you keep the overseas account, it could certainly raise questions in the minds of IRS specialists. Also, the IRS is intensely focused on any individuals who hold an offshore bank or any kind of security accounts. Also, the residents and citizens of U.S who hold any foreign assets are required to report it to the IRS on form 8938.

Involving in huge money transactions

The IRS obtains many reports concerning the excess amount of currency transactions via bank deposits and withdrawals, casino visits etc. Even many banks also fill out an IRS reporting form for cash transactions of over $5,000. It is advisable to take note of these transactions and be prepared to give an explanation in the case asked for.

Hiding the taxable income

If you file a return which doesn’t match up with the records sent to the IRS by your employer, you are most likely to be called into account as the IRS gets all the copies such as 1098’s, 1099’s and W-2’s. Hence, it’s always better to file a return on all your taxable income.

Corporate deductions and Personal expenditures

It is always better to keep corporate and personal expenditures at a distance as much as possible because the IRS experts will have all the particulars regarding your family members and are greatly skilled to check the significant purchases made immediately prior to birth dates or anniversaries.

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