The IRS has the authority to audit taxpayers and assess additional taxes for a certain period of time. This period is known as the statute of limitations. The IRS has different statutes of limitations depending on the type of tax and the circumstances of the taxpayer. One of the most significant is the 6-year IRS statute of limitations. Here is everything you need to know about the 6-year IRS statute of limitations.
Definition of 6-Year IRS Statute of Limitations
The 6-year IRS statute of limitations is the period the IRS has to audit a taxpayer’s returns and assess additional taxes, penalties, and interest for a substantial omission of income. A substantial omission of income means that the taxpayer failed to report more than 25% of their gross income on their tax return.
Calculation of 6-Year Statute of Limitations
The 6-year statute of limitations begins on the date the taxpayer files their tax return or the due date of the tax return, whichever is later. For example, if a taxpayer filed their 2019 tax return on April 15, 2020, the IRS has until April 15, 2026, to audit the taxpayer and assess additional taxes, penalties, and interest for a substantial omission of income.
Exceptions to 6-Year Statute of Limitations
There are several exceptions to the 6-year statute of limitations. If the taxpayer engages in fraud, the IRS has an unlimited period of time to audit the taxpayer and assess additional taxes, penalties, and interest. If the taxpayer fails to file a tax return, the IRS has an unlimited period of time to audit the taxpayer and assess additional taxes, penalties, and interest. Additionally, the 6-year statute of limitations does not apply to state tax returns or certain types of taxes, such as employment taxes.
Importance of 6-Year Statute of Limitations
The 6-year statute of limitations is important because it provides a degree of certainty for taxpayers. Once the statute of limitations has expired, the IRS cannot audit the taxpayer or assess additional taxes, penalties, and interest for a substantial omission of income. This means that taxpayers can file their taxes with confidence, knowing that they will not be subject to an IRS audit or assessment after the statute of limitations has expired.
Risks of Not Reporting Income
Not reporting income can be a risky strategy. If the IRS discovers that a taxpayer has failed to report more than 25% of their gross income on their tax return, they can assess additional taxes, penalties, and interest for up to six years after the date the taxpayer filed their tax return or the due date of the tax return, whichever is later. This can result in significant tax liability and trigger an IRS audit, which can be stressful and time-consuming.
Penalties for Failing to Report Income
If the IRS determines that a taxpayer has failed to report more than 25% of their gross income on their tax return, they can assess penalties in addition to the additional taxes and interest. The penalty for a substantial understatement of income is 20% of the additional tax due. The penalty for fraud is even higher, at 75% of the additional tax due. These penalties can add up quickly and can significantly increase the taxpayer’s overall tax liability.
Importance of Accurate Reporting
Accurate reporting of income is essential to avoid the risks and penalties associated with failing to report income. Taxpayers should keep accurate records of all income, including wages, tips, and other forms of compensation. Taxpayers should also keep records of any deductions and credits claimed on their tax returns. By keeping accurate records and reporting all income, taxpayers can reduce the risk of an IRS audit and avoid the penalties associated with failing to report income.
Steps to Take If Audited
If a taxpayer is audited by the IRS, it is important to take the process seriously and cooperate with them. The taxpayer should provide any requested documentation and answer any questions truthfully. It is also a good idea to consult with a tax attorney or other qualified tax professional to help navigate the audit process.
Importance of Seeking Professional Help
Navigating the IRS and the tax code can be complicated and confusing. Seeking the help of a tax attorney or other qualified tax professional can be invaluable in ensuring compliance with tax laws and minimizing tax liabilities. A tax attorney can help taxpayers understand their rights and obligations and can represent taxpayers in negotiations with the IRS.