Taxes are inevitable, but understanding the rules and regulations that govern them does not have to be a taxing experience. One of the critical aspects to understand regarding taxes is the IRS statute of limitations. This sets the timeframe within which the IRS can audit taxpayers, assess additional taxes, or take collection action. The statute of limitations helps protect taxpayers from indefinite scrutiny and potential liability.
Deciphering the IRS Statute of Limitations
Simply put, the IRS statute of limitations is a time limit established by law. This determines how long the IRS can audit a tax return, assess additional tax, or take collection action.
Crucial timeframes include:
- The Three-Year Rule: As a general guideline, the IRS has a three-year window from either the due date of the tax return or the date it was filed (whichever is later) to carry out audits, assess additional tax, or initiate collection actions. However, certain circumstances can extend or suspend the limitation period.
- The Six-Year Rule: If a taxpayer underreports their gross income by more than 25%, the IRS has a six-year statute of limitations to audit and assess additional taxes.
- No Limitation: There is no statute of limitations for tax fraud or filing a false tax return. This allows the IRS to audit and assess additional taxes at any time. Similarly, there is no statute of limitations for unfiled tax returns.
When the Statute of Limitations Gets Flexible
In some cases, the IRS and FTB may request that a taxpayer voluntarily extend the statute of limitations. This usually happens when more time is needed to complete an audit or review. Taxpayers have the right to decline. However, refusal may prompt the IRS or FTB to assess additional tax based on available information.
The statute of limitations can be suspended due to specific events or circumstances, such as:
- The taxpayer has been continuously outside the United States for at least six months.
- The taxpayer files for bankruptcy.
- The taxpayer and the IRS or FTB are engaged in a legal proceeding, such as litigation, regarding the tax matter.
Why Do Taxes Get Flagged by the IRS?
- Mathematical Errors: Simple calculation mistakes or discrepancies between the figures reported on various forms can draw the attention of the IRS. Using tax preparation software or consulting with a tax professional can help minimize errors.
- Unreported Income: Failing to report all your income can raise suspicion. The IRS cross-references the information on your tax return with data from employers, financial institutions, and other sources. Report all income, including wages, interest, dividends, and self-employment earnings.
- Large or Unusual Deductions: Audits can be triggered by claiming significantly higher deductions than the average for your income level. Claiming unusual deductions can also flag your return for a review. Ensure that you only claim legitimate deductions. Also, maintain proper documentation to support them in case of an audit.
- Home Office Deductions: Claiming a home office deduction is legitimate. However, it can also be a red flag if the deduction is disproportionate to your income. The requirements for a home office must also be met. Be cautious and adhere to IRS guidelines when claiming this deduction.
- Independent Contractor Status: If you classify workers as independent contractors rather than employees, the IRS may scrutinize your tax return. They want to ensure that you are not avoiding payroll taxes and other responsibilities associated with employee classification.
- Frequent Losses on Schedule C: Reporting consistent losses on Schedule C for your sole proprietorship or self-employment may raise questions. For tax purposes, the IRS may investigate whether your business is genuinely profit-motivated or simply a hobby.
- Incomplete or Missing Information: Neglecting to provide all required information on your tax return, such as Social Security numbers, tax identification numbers, or supporting documentation, can lead to an IRS flag.
Q: What Are the IRS Changes for 2023?
A: For the tax year 2023, there are several noteworthy IRS changes that taxpayers should be aware of. These include:
- Adjustments to tax brackets and standard deductions due to inflation
- Modifications to retirement account contribution limits
- Alterations to various tax credits
Keeping track of these changes is essential. It ensures accurate tax calculations and compliance with federal tax laws. To stay informed, consider:
- Regularly visiting the IRS website
- Subscribing to their newsletters
- Consulting with a tax professional who stays up to date with tax law changes
Q: How Do I Fight the California Franchise Tax Board?
A: If you disagree with a decision made by the California Franchise Tax Board (FTB), you have the right to contest it. Begin by gathering all relevant documents and records that support your position. Next, contact the FTB to discuss your concerns and potentially resolve the issue informally. You may file a formal appeal or protest if the matter remains unresolved. In more complex cases, consider consulting with a tax professional or attorney who focuses on tax law. They can guide you through the process and represent your interests effectively.
Q: What Happens When the IRS Statute of Limitations Expires?
A: When the IRS statute of limitations expires, the agency loses its legal authority to audit a tax return, assess additional tax, or initiate collection actions related to that tax year. This expiration gives taxpayers a sense of finality and protection from indefinite scrutiny. However, it is essential to note that there is no statute of limitations for tax fraud or filing a false tax return. Additionally, there is no statute of limitations for unfiled tax returns.
Q: How Can I Minimize the Risk of an IRS Audit?
A: To minimize the risk of an IRS audit, it is vital to maintain accurate and thorough financial records. Also, be sure that your tax returns are complete and error-free. Double-check your calculations, report all income, and claim only legitimate deductions and credits. Additionally, be cautious with large or unusual deductions that may raise red flags. Consulting with a legal tax professional can help ensure your returns are accurate and compliant with tax laws. Always be proactive and diligent with your tax responsibilities. That way, you can reduce the likelihood of drawing unwanted attention from the IRS.
Contact Coggins Law Today
At Coggins Law, we are committed to providing knowledgeable legal advice and representation for all of your tax-related matters. We understand the complexities of the taxation system. Our team can help you navigate IRS audits, collections, appeals, and more. Do not face your tax issues alone—contact us today to get started.