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Time Limits for the IRS

IRS auditors must complete audits within 28 months of the date the audited taxpayer filed the tax return, or by the date it was due, April 15, whichever is later. Actually, the law gives the IRS eight additional months after that (for a total of 36 months, or three years), but auditors need to leave at least eight months in which the IRS can process appeals. This means that taxpayers need to keep their tax records and supporting documents for at least that long. This three-year limit does not apply, however, if they underreported their income by more than 25 percent. In those cases, the IRS has six years in which to conduct an audit and assess additional taxes if they are warranted. There is no time limit at all for audits in cases where taxpayers file fraudulent returns. Given these factors, the common wisdom says that taxpayers should retain tax records for at least six years.

Sometimes the IRS is not able to complete an audit within its three-year time limit. In such cases, the IRS may extend this time limit. Taxpayers do not have to agree to an extension, but the IRS can make the audit very unpleasant if they do not get an extension. The IRS will typically respond to a refusal by disallowing every questionable item on the return being audited. It may be a better strategy to negotiate an extension with a definite expiration date and to restrict the extension to only those items in question when the extension is granted. This keeps the IRS from expanding its audit to other areas of the return during the extension period.

Occasionally a taxpayer will be notified by the IRS about an impending audit, but then the taxpayer will not hear from the auditor for a long time. This can mean several things. For example, the auditor may no longer work for the IRS or may have changed jobs within the IRS. It is possible that the taxpayer’s file is being processed somewhere else within the IRS. If and when the file again comes to the IRS’s attention, it may be assigned to a new auditor who is working under a shortened deadline to close the audit. This can work in the taxpayer’s favor. So, although the taxpayer may be tempted to inquire about the status of the audit, it may be best to remain silent.

It may be a good idea for the taxpayer to have the person who prepared the taxes (if the taxpayer had a paid tax preparer) appear at the audit with him to explain how the taxes were figured. If an attorney, CPA, or an “enrolled agent” prepared the tax return, that person can even appear in the taxpayer’s place. Other kinds of tax preparers may accompany their clients to an audit, but they cannot represent clients at the audit. In some cases where permissible, it may be better for the taxpayer not to attend the audit, since the professional representing the taxpayer has no emotional involvement in the outcome of the audit. These people may be less likely to irritate or raise the suspicions of the auditor.

Perhaps the best advice about audits is never to provide more information than the IRS requests. Most audits are limited to specific areas of a return, which the taxpayer knows in advance. At the audit, the taxpayer should limit his response only to inquiries the auditor makes about these specified areas. If the auditor attempts to examine other areas of the return, the taxpayer should refuse to discuss them until he has received a formal request to audit that portion of the return. Although most audits are limited in scope, there are a small number of taxpayers (about 50,000) that are subjected to a Tax Compliance Measurement Audit. This kind of audit examines every item on the tax return. Naturally, these taxpayers must respond to all of the auditor’s inquiries.

Inside Time Limits for the IRS