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What is the time limit on an audit?

For most California readers, the Internal Revenue Service (IRS) works in mysterious ways. That is to say that sometimes even the most careful taxpayers can be surprised by an audit or a request for documentation from the IRS in a tax evasion or fraud matter if the IRS has received information indicating a discrepancy between taxes paid and taxes owed.

Sometimes taxpayers find out a little too late that the IRS has flagged their file, after a big move or the sale of a company has encouraged the disposal of financial records that were believed to be out of date. In many cases it can be confusing to try to figure out when it is safe to toss old financial documents, or at least when the period for a potential audit on that year's finances has passed. Like many things in the law, the answer is "it depends" , but luckily there are some basic guidelines that apply to many cases.

To start, the standard statute of limitations on an audit for tax evasion or fraud is three years from the time of filing. Note that it is not three years from the time of the earnings or from the tax year, but from when the return was filed, so the statutory period could start to run as late as October of the following year if the taxpayer filed an extension. The statutory period doubles if the accusation involves concealing more than 25 percent of one's income, so in that case it would be six years from the date of filing. Other specific exceptions apply as well, so it helps to consult with an experienced tax attorney over any questions on prior taxes before disposing of documentation.

Source: Forbes, "How Far Back Can IRS Claim Tax Evasion or Fraud? Timing is Everything," Robert W. Wood, Oct. 13, 2013.

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