When are you safe from a tax audit? Or, All things must pass, maybe!

By Sanford Millar of MillarLaw A Professional Corporation On Wednesday, June 26, 2019

The most common question I am asked when the subject to taxes comes up in conversation is “how long does the IRS have to audit me?”.  The answer of course is, it depends.  There are a variety of Statutes of Limitations, depending on the type of return, but the general civil tax rule (statute of limitations) is the IRS has three (3) years from the later of the filing date or “due date to audit a timely filed return.  Exception, and this is a big one, if there is fraud in the return, then there is no limitation on the right of the IRS to examine a return.  Criminal tax case have a general 5 year statue of limitations from the filing of the return.  This note focuses on the unlimited statute of limitations for fraud and how you can avoid the 75 % Fraud penalty.

The combination of an unlimited time frame to audit a return and a 75% penalty  give the IRS a significant advantage in dealing with potentially fraudulent returns.  Taxpayers sign returns under penalty of perjury, meaning that you are presumed to have read and understand the entire return.  If your tax preparer has a pet trick to boost your refund, you are o the hook for his/her fraudulent acts.   Let’s assume you under report cash income but your bookkeeper is aware of what you are doing.  Your bookkeeper, decides that the “whistleblower” reqard of 15%-30% of the tax collected is more important than loyalty files a “whistleblower claim ten years into your scheme.  You are exposed for all ten years.  What is the remedy?

You can sweat out each day hoping you do not get an audit notice, or you can take conrol of the situation and come forward and make a Voluntary Disclosure.    Domestic Voluntary Disclosures come with tax and audit risks, but you can generally avoid the Fraud penalty.  The decision to come forward has to be thought through carefully but can prove to the best choice in a sea of awful outcomes.  We use voluntary disclosures when the facts fit and the client is tired of hiding.  We are here to help.