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Did the IRS just give itself more time to conduct audits?

In our last post, we discussed five ways in which a person can inadvertently increase their chances of having to endure the nightmare that is an audit by the Internal Revenue Service.

If you are feeling any sort of lingering anxiety after reading this post or other materials on the Internet -- perhaps thinking about returns from years past -- you can derive some comfort from the fact that the statute of limitations for conducting an audit is generally three years. 

However, it's important to understand that there are certain exceptions to this rule. In particular, there are scenarios in which the applicable statute of limitations for conducting an audit is actually extended up to six years.

One scenario in which the time allotted for an audit is doubled to six years is for what the IRS terms a substantial understatement of income, meaning a person omits over 25 percent of their income in a tax filing.

While this may seem like a fairly clear definition, it has actually been the source of some confusion over the years with the IRS arguing that it includes more than just gross income.

Indeed, in U.S. v. Home Concrete & Supply, LLC, a 2012 case, the Supreme Court of the United States was called upon to help resolve the longstanding issue of whether overstating a tax basis (i.e., the amount invested in a property) constituted omitting income for the purposes of having six years to conduct an audit.

Here, the court ruled that overstating a tax basis did not equate to omission of income, such that the statute of limitations for an audit in these circumstances was only three years.

While you might think this was the final word on the matter, consider that the recently passed Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 contained a provision expressly declaring that "an understatement of gross income by reasons of an overstatement of … basis is an omission from gross income."

This means that, despite the Supreme Court decision, the statute of limitations for an audit in these circumstances is now six years.

What all of this really serves to underscore is that audits can prove to be incredibly complex and that those who find themselves in this unenviable position should strongly consider speaking with an experienced legal professional who can examine any and all issues, including whether the statute of limitations for pursuing an audit has expired.

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