We have a brand new court case on an egregious IRS audit that we will discuss below, but first let’s review some of the rules on audits. Most of us are aware that the IRS may audit a return for up to three years from the actual filing date of a tax return or the due date of the return, whichever is later, to audit the normal tax return.
However, the IRS has six years from the date a return is filed to audit a tax return and to assess additional tax if the taxpayer omits income that amounts to more than 25% of that which was reported on the tax return. The IRS also has six years to audit a tax return and assess additional tax on income related to undisclosed foreign financial assets if the omitted income is more than $5,000.
In the case of a fraudulent, false or unfiled return, there is no statute of limitations-the taxpayer may be audited forever.
Finally, the IRS has 10 years to collect the full amount from the day a tax liability is finalized, plus any penalties and interest. If the IRS doesn’t collect the full amount in the 10-year period, the remaining balance disappears forever because the statute of limitations has expired.
Many taxpayers fear an IRS audit, but my experience in nearly every case is that the agent is fair and professional. In-person audits can be very time-consuming, but the well prepared taxpayer with good records will usually prevail on most points. IRS Publication 556 provides excellent information about the audit process, appeals and tax court.
IRC Sec. 7605(b) states that “No taxpayer shall be subjected to unnecessary examination or investigations…” and we all know the policy from the Internal Revenue Manual at 188.8.131.52.2(3) that guides the agent to close an exam that is repetitive (exam in either of 2 prior years with no change). What we are not aware of however is the ability of an examiner to determine that the repetitive audit rule does not apply.
In a recent court case a taxpayer apparently has upset someone at the IRS as evidenced by multiple audits on the same issue.
In TC Summ. Op. 2017-36 (Keeter) the Tax Court confirmed that disability payments received by an individual with a military-related disability for injuries received from service is tax-free under IRC Sec. 104(a)(4). In an unusual example of heavy-handedness by the IRS, Mr. Ketter had been twice-audited in the past on the same issue, and also had to go to court, where he also won in court on both previous occasions. He is also currently petitioning the court for payment of his legal costs under IRC Sec. 7430.
Posted with permission. Original post: Bob Jennings, CPA – TaxSpeaker.com
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