Beware: IRS Now Has Six Years To Audit Your Taxes, Up From Three

No one wants to be audited, so knowing how long your tax return can be attacked is important. The statute of limitations on taxes is a fundamental rule allowing taxpayers to eventually cut off their exposure. It can be pretty satisfying to say to the IRS, “sorry, you’re too late.” But this year, that will be a little harder due to an expansion of the IRS’s power to audit for extra years.

Traditionally, the primary IRS statute of limitations was three years. But there are many exceptions that give the IRS six years or longer. Several of those exceptions are more prevalent today, and one of them has gotten bigger, despite a decision by the U.S. Supreme Court.

The three years is doubled to six if you omitted more than 25% of your income. For years, there was a debate over what it means to omit income from your return. Taxpayers and some courts said “omit” means leave off, as in don’t report. But the IRS said it was much broader.

Example: You sell a piece of property for $3M, claiming that your basis (what you invested in the property) was $1.5M. In fact, your basis was only $500,000. The effect of your basis overstatement was that you paid tax on $1.5M of gain, when you should have paid tax on $2.5M.

In U.S. v. Home Concrete & Supply, LLC, the Supreme Court slapped down the IRS, holding that overstating your basis is not the same as omitting income. The Court said 3 years was plenty for the IRS to audit. But Congress recently overruled the Supreme Court and gave the IRS six years in such a case.