When taxpayers begin to suspect that they may have made simple or complex tax errors on past tax returns, one of the first things they want to know is whether the full range of their mistakes can be audited by the IRS, the California Franchise Tax Board, or other tax agencies. Taxpayers who realize that the IRS can look back several years — and in some cases, many years or indefinitely – are probably less likely to make mistakes in the first place. Furthermore, because they realize that tax errors can stick around for many years, they may be more likely to correct mistakes before an audit is launched with potential significant tax penalties.
The Sacramento tax lawyers of NewPoint Law Group can assist taxpayers who believe that they may have made income, sale, employment, or other tax errors. We work diligently and strategically to determine a path that is likely to correct your concerns, and to minimize or eliminate the penalties you face. To schedule a confidential consultation in Roseville or Folsom, call our law firm at 1-800-358-0305.
Typically, the IRS Can Look Back for Up to Three Years
While the number of years that the IRS can audit your taxes is based on particularized factors (the nature of the transactions, your conduct, and the likelihood of fraud), there is a general rule that sets forth the number of tax years the IRS can audit. In general, the IRS has three years to audit a particular tax year; this three-year audit window may not sound particularly onerous, but numerous exceptions often mean additional audited tax years.
Significant Tax Understatements Can Double the Look-Back Window to Six Years
If you are accused of omitting significant parts of your income, the IRS can look back for up to six years. Generally, significant understatement of income occurs when a taxpayer fails to report 25% or more of his or her income. Alternatively, if there is foreign income, an understatement of $5,000 or more can trigger a doubling of the audit period. Clearly, six years is a long time. If the IRS is already making substantial understatement or allegations, there is a high likelihood that they will be able to uncover at least some mistakes or improprieties. But, it can still get worse.
Fraud Allegations and Failure to File Can Result in an Open-Ended Look-Back Period
If you’re accused of committing fraud, then the IRS can look back at your taxes indefinitely. While rare, the IRS can and has started enforcement actions decades after the original conduct occurred. Fraud allegations are signs that your matter is extremely serious, and aside from monetary fines and penalties, prison time may even be a possibility. Though there is a high burden for the IRS must satisfy regarding fraud allegations, the failure to file taxes can also give rise to an indefinite audit window. By contrast, the failure to file is typically clear-cut.
California Has Its Own Rules for FTB and Other Audits
As Californians, the IRS is not our only worry; the Franchise Tax Board handles income tax obligations and audits, the Board of Equalization handles state sales and use tax obligations, and, finally, the Employment Development Department handles payroll taxes.
Under California law, the basic tax statute of limitations is four years. However, there is an interesting wrinkle in California law that can also result in an indefinite audit period. That is, if you are impacted by tax adjustments made by the IRS, California law requires you to file amended taxes. If you fail to file amended taxes, the audit period will never begin to run and the state tax agency will theoretically be able to audit at any point in the future.
Concerned About Past Tax Mistakes and in Need of a Sacramento, California Tax Lawyer?
If you are worried that past mistakes on taxes will come back to upend your plans for the future, the best thing to do is to address them as soon as possible. The IRS is known to be more receptive to mitigating penalties when the taxpayer comes forward voluntarily, shows a willingness to address past errors, and comes into compliance with the law. To schedule a confidential tax consultation with a Sacramento tax audit attorney at either of our Sacramento-area law offices in Folsom or Roseville, please call 1-800-358-0305 or contact us online today.