Did the IRS Just Lose the Right to Audit Your Return?
The Supreme Court recently took away from the IRS audit power that the IRS misused for years against taxpayers. Tax laws only allow the audit process of the IRS to add taxes to your bill if the IRS finishes the audit process and adds additional tax within three years after the return was filed. Congress allows a limited exception if a taxpayer hid income items that added up to more than 25 percent of their receipts of moneys from their tax return. For years, the IRS interpreted that “income omission” exception to allow them to conduct audits and add taxes to your tax bill up to six years after you filed your return even if you only happened to be wrong about something other than an income omission — like a deduction or the amount of “basis” in the sale of a capital asset. Now, the Supreme Court told the Internal Revenue Service it was wrong and had no right to audit taxpayers and add tax past the three-year limitations in the tax laws where the taxpayer merely made a mistake about a deduction or the basis in an asset, but never hid income from their return. It is one of the kind of differences between lawful avoidance and avoiding taxes and unlawful evasion of taxes of the kind that can cause criminal investigations. www.supremecourt.gov_opinions_11pdf_11-139
Getting a deduction wrong or the basis in an asset mistaken is a common civil mistake; it does not mislead the IRS the way completely omitting or hiding money from the return does. The 3-year-shorter limit on audits and adding tax to your tax bill is what Congress intended for those who include the amount, but simply get the tax ort accounting interpretation of the meaning of the amount mistaken.
What does that mean? It means thousands of IRS audits and the audit process happening right now to millions of Americans should be stopped in their tracks. It means hundreds of U.S. tax court cases pending right now should be dismissed or ruled in favor of the taxpayer. It means millions of Americans just got their rights back against the IRS misusing the audit process.
A quick cheat-sheet for the limits on the IRS reviewing non-fraudulent returns:
If you completely left out the receipt of money from your return, then the IRS has 6 years to audit and add tax;
If you got the basis in your asset wrong on your tax return, then the IRS has only 3 years to audit and add tax;
If you included a deduction that was mistaken, then the IRS has only 3 years to audit and add tax;
Remember your rights; they are all that protects you from unfair government conduct and overreaching. The Supreme Court just reinstated a critical right for you in the audit process against the IRS to protect innocent mistakes in for people seeking lawful means to avoid taxes.