It’s April 15th at 11:59 pm, and you just submitted your income tax return to be e-filed with the IRS. It’s done! What a relief! Preparing and filing a tax return can be stressful. Thinking about having to pay the IRS is stressful. But you made it to the light at the end of the tunnel. Your tax return has been filed, so you can relax. You don’t have to worry about taxes again until April of the following year – right? It's easy to assume that once you’ve paid your tax liability or you’ve received your tax refund in your bank account, the tax year is closed. Well, that is not entirely true.
The hard truth is the IRS begins to review tax returns for accuracy after the filing season has ended. Most audits occur within two years of the filing date of a tax return. Generally, the IRS has three years from the date the return was due or filed, whichever is later, to audit and assess additional tax on a tax return. This three-year period is called the Assessment Statute Expiration Date (ASED). Once the ASED has expired, the IRS cannot make changes that increase the amount of tax due on a tax return.
You may be saying to yourself, “That seems simple enough.” But simple isn’t a term to define anything associated with IRS processes and procedures. As with anything related to the IRS, there are exceptions to the original three-year Assessment Date. For example, there are situations where the IRS has six years to assess additional tax, and there are also situations where the IRS has no set time to assess additional tax.
Six-Year Assessment Date
The IRS has six years to audit and assess additional tax on a tax return when gross income, before any adjustments or deductions are applied, has been understated by 25% or more. The 25% understatement does not have to be deliberate for the IRS to extend the assessment date. Understating income can occur by something as simple as forgetting to enter a W-2 or mistyping a number into your tax return.
Example
In 2022, Lisa Smith lived and worked in Atlanta, GA until February and then relocated to Dallas, TX where she started working for a new company. She received a W-2 from Company B in Dallas, TX reporting $100,000 in wages. Lisa also received a W-2 from Company A in Atlanta, GA reporting $25,000 in wages; however, Lisa had already filed her tax return before receiving the W-2 from Company A. The IRS has six years to audit and assess additional tax on Lisa’s tax return (unless Lisa is proactive and makes an effort to amend the original return).
No Assessment Date Applies
To think the IRS may have six years to audit and assess additional tax on a tax return can be a bit daunting. One would think that six years must be the maximum time the IRS can have to assess additional tax. Yet, there are instances when the IRS has an unlimited amount of time to assess additional tax. When someone doesn’t file a required tax return, the IRS can assess tax at any time. The IRS can also prepare a tax return with wage and income information provided by employers and financial institutions. This IRS-prepared return is called a
Substitute for Return. However, the normal three-year assessment period does not begin with the filing of a Substitute for Return. The assessment period begins when that person files an actual tax return for that tax year. The IRS also has an unlimited amount of time to assess tax when a false or fraudulent tax return with the intent to avoid tax has been filed.
Just because you’ve met your filing and payment obligation for the tax year by submitting a tax return doesn’t mean you’re finished. You’ve heard the saying, “It’s not over until the fat lady sings.” Well, the fat lady hasn’t sung, and the IRS assessment period is still open for at least the next six years if enough gross income was omitted from the return. And if the IRS believes the omission of income was deliberate, then settle in because the IRS has all the time they want to assess additional tax – not to mention penalties and interest. Don’t discard your tax documents and be prepared if you receive an audit notice from the IRS.
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