No one wants the IRS to audit their US Tax Returns, but with new legislation the IRS now has a longer time period to determine if you will be audited. With the strict standards and complex regulations regarding expat taxes, it’s crucial to understand how long your US Tax Returns can be scrutinized and also how to avoid the common mistakes that could potentially lead to an audit.
Statute of Limitations for Audits Is Now Six Years
With the H.R. 3236, Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Congress overrules the Supreme Court and grants the IRS the authority to extend the audit period from three years to six years.
Some observers thought the Supreme Court might try to find a way to allow the IRS to go for six years. Nope, the High Court stuck to three years. But Congress just gave the IRS the last laugh. – Forbes
Previously, the audit period has been three years, but with this new legislation the IRS can now double the audit period to six years if substantial underpayment of income is detected. Substantial underpayment of income refers to when more than 25% of income is omitted. This change took effect for tax returns filed after July 31, 2015 and it also applies to previously filed returns that are still open with the IRS.
For years, there was a debate over what it means to omit income from your return. Taxpayers and some courts said “omit” means leave off, as in don’t report. But the IRS said it was much broader. – Forbes
So, what does omitting your income really mean? The US Supreme Court had originally ruled that overstating your tax basis is not the same as omitting income, but this new legislation clearly redefines this and makes it much boarder. The ruling states, “an understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.”
Audit Periods Can Extend Beyond Six Years
In some cases, the IRS can extend the audit period even longer than six years. If you have never filed a return or if you omit certain tax forms, the IRS can extend the audit period indefinitely. While only about 1% of American taxpayers get audited annually, US expats run a much higher risk of being audited due to the fact that their income is harder to verify and there is a such a focus by the IRS to monitor offshore income, assets and bank accounts. It’s interesting to note that the new six-year audit period now matches the audit period for FBAR. So, make sure to review the list of tax forms that carry a higher audit risk than others here.
US taxes are daunting enough, but with the added responsibility of filing as a US expat it’s crucial to make sure you understand all of your filing requirements and thresholds in order to minimize the risk of an audit.
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