Q: After what period is my federal tax return safe from audit?
A: Generally, the time frame within which the IRS can examine a
federal tax return you have filed is three years. To be more specific,
Code Sec. 6501 states that the IRS has three years from the later of the
deadline for filing the return (usually April 15th for
individuals and sole proprietorships) or date you actually filed the
return. This means that if you file your return on May 10, 2006, the IRS
will have until May 10, 2009 to look at it and "assess a deficiency;"
not April 15, 2009.
There are exceptions and caveats to this general principle, however.
If you file prior to April 15, the IRS still has until April 15 of the
third year that follows to audit your return. This means that if you
filed an income tax return on February 10, 2003, you still won't be
out-of-the-woods until April 16, 2006. For taxpayers who file fraudulent
returns, incorrect returns with the intent to evade tax, and those who
do not file at all, the IRS may open an audit at any time.
(Don't confuse the deadline for IRS tax assessments with your right
to file a refund claim for an amount that you overpaid, either on a
filed return or through withholding or estimated tax payments. That
deadline is the later of three years from the filing deadline or two
years from your last tax payment.)
You may also find some comfort in the practical IRS audit-cycle
rhythm. While you are never truly beyond an audit until the statute of
limitations has properly run, there are some general standards to keep
in mind. Office audits are usually done within 1 1/2 years of the time
the return was filed, and field office audits are complete by 2 1/2
years. The rule of thumb is that if you haven't been contacted within
this time frame, you're probably not going to be. Especially for small
businesses, the IRS has promised to shorten its normal audit cycle so
that those taxpayers are not "left hanging" on potential tax liabilities
(with interest and penalties) until the three-year limitations period
has expired. Whether this shortened period happens, however, is still
open to speculation. Most businesses should continue to make it a
practice to keep "tax reserves" to cover such audit liabilities.
Finally, it's important to note that audit rates are on the rise. In
2005, the IRS managed an audit of almost one percent of all individual
tax returns filed. The rates for businesses were higher, with almost 50
percent of large, wealthy corporations being examined.
