The Tax Blotter – Feb. 2024

The Tax Blotter is a round-up of recent tax issues and Tax Court rulings.

Although audit rates have been historically low the last few years, the IRS is expected to begin targeting more individuals, especially high-income taxpayers.

Start the clock. How long does the IRS have to audit your return? Generally, the “statute of limitations” for audits is the later of three years from the date your return is filed or the tax return due date. Therefore, the deadline for 2023 returns is usually April 15, 2027. However, the time period is extended to six years if you underreport your taxable income by more than 25%. And there’s no time limit whatsoever if fraud is involved.

Don’t push panic button.  Most IRS “audits” are relatively minor matters that are handled through the mail. Typically, you will receive a CP2000 notice if the IRS computers detect an entry on your return that doesn’t match information provided by a third party, like a financial institution. You can follow the stated process for contesting the determination or simply pay the deficiency. Field investigations involve more complex matters. Note: The IRS will never call you on the phone or text you about an audit.

Ignorance is not bliss. The IRS can go back to audit returns filed longer than three or six years ago if fraud is involved. In a new case, a tax return preparer made false and fraudulent entries on a couple’s tax returns for several tax years in an attempt to evade tax. The IRS audited the taxpayers well after the statute of limitations had expired. Tax outcome: The Tax Court allowed the IRS to assess back taxes, interest and penalties on the taxpayers even though they had no knowledge of the fraud (Murrin, TC Memo 2024-10, 1/24/24).