Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

How long should you fear the tax man?

                                                                - by Alan Duvall 

Published in Dayton Daily News April 23, 2006 

For many individuals, April 15 marks the end of tax filing season.  For others mentally residing in an aura of paranoia, the day eliminates one more return from the potential prey of IRS audit marksmen.

Generally, the IRS has three years from the actual filing or due date, whichever is later, to audit taxpayer federal returns.  To illustrate, if an individual files returns on March 1, 2006 - the IRS has until April 15, 2009 to audit the return.

Inevitably exceptions abound.  A six-year timeline exists for returns that omit 25% gross income.  Exception to the exception – the omission does not extend the three-year if sufficient information is presented within the return to adequately apprise the IRS of the issue.  Exceptions to exception to exception?  Yes, but let’s not go there.

The IRS has an unlimited time to audit returns deemed “false or fraudulent” or alternatively situations where no return was ever filed.  Consider this a permanent tax purgatory until the taxpayer willingly repents for his sins.

The statute of limitations can also backfire on prognosticating taxpayers who somehow neglect to file returns when  they’re due.  If refunds are actually owed to such taxpayers, they only have three years from the original due date to file returns or forever lose free money. 

Ridiculous notion?  The IRS estimates 1.7 million non-filers forfeit $2 billion in refunds each year.

Inefficient Ohio believes its auditors need an extra year to audit taxpayer returns.  So four years from the later of due date or actual filing is the state rule of thumb with extension provisions similar to federal guidelines.  Ohio cities typically retain the three-year statute.

If your lucky number is picked out of the IRS audit hat, do not be surprised if the process takes so much time the auditor requests a statute extension.  Refusal to sign an extension will only force the auditor to write up issues as final in a report to preserve government collection rights.  You can appeal the findings – but only to an agent higher up the food chain of authority.  It’s typically best to sign the extension agreement cursing tax gods for their inconsideration.

Great news.  President Bush just signed into law a provision increasing the IRS budget a record $443 million in enforcement funding.  Flush with new cash, IRS audit rates have increased dramatically in recent years, particularly with regard to high-income individuals and corporations, yielding a record $47 billion collection of previously unpaid taxes in the 2005 fiscal year.

Fortify your financial walls – the riders of the tax apocalypse are coming!

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.