The Ability of the IRS to Audit Taxpayers Just Doubled for Many

Most people that have paid tax in the United States have come to the realization that the rules and regulations that make up our nation’s tax laws are constantly changing. In fact, it is a common purported truth in the industry that a person attempting to read the Internal Revenue Code at length would be unable to finish it before Congress changed the law. That being said, most taxpayers can remember a few important tax rules that have, for an appreciable amount of time, remained constant. One of those rules of thumb is the fact that the IRS typically has three years to audit the return of a taxpayer. But for a considerable amount of taxpayers, that constant is changing and the news is a reminder that whenever you run into tax problems, you should turn to an experienced tax practitioner who stays on top of all of the latest developments in the law of taxation and accounting.

Three and Six Year Audit Windows

The general three-year rule that most people are familiar with is still at-play and isn’t going anywhere anytime soon. As a refresher, the IRS is allowed by law to audit and assess a deficiency against a taxpayer going back three years. This allowable period expands to six years if the taxpayer understated their income by more than 25%. For instance, if a taxpayer made 100 dollars in Year 1 and only reported that he made 74 dollars to the IRS, the period which the Service could audit and assess an additional tax against the taxpayer would extend until Year 7, or six years from the date that the Year 1 return was filed or due (whichever was later). But what happens when the taxpayer incorrectly computes tax liability based on an erroneous number that isn’t income?

In U.S. v. Home Concrete & Supply, LLC, the Supreme Court was faced with an intriguing question: if a taxpayer miscalculates or overstates an asset’s basis by over 25%, can the IRS extend the statute allowing an audit to the full six-year period? In  2012, the High Court ruled that the IRS could not. The Court relied on the plain wording in the law to restrict the Service to only extending an audit period for an understatement of income and not of basis.

Congress Takes Action

But like any federal law, Congress is free to change the statute at any time. That is exactly what the Congress did as a new law that changes the rules on an extended audit period was signed into law by President Obama last Thursday. Nestled in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 is language that expands the understatement of income to include the overstatement of basis. The law affects new returns filed after July 31st, 2015 in addition to returns that are currently open.

The constantly changing landscape of tax law evidences the need for a tax attorney that is on top of pertinent changes in the law and in the practice of the IRS. For instance, an attorney or other tax professional that is not aware of the new change to the auditing law scheme may give a client incorrect advice as to a risk of audit or the ability of the IRS to assess a deficiency.

Contact an Experienced Tax Attorney

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing clients in various types of tax matters including audits, investigations, and full-blown criminal and civil litigation. The IRS and the Department of Justice consistently send their highly trained personnel to meet with taxpayers during audits and investigations, which can result in a taxpayer divulging information that could be incriminating or helpful in pursuing a case against them, at the very least. Be sure to have a zealous advocate in your corner. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.