Article Posted on 02/22/2019
Usually the IRS can only audit a taxpayer for the last three years. The clock starts on the day you file your return so if you file an extension and file your return on October 15th that is when the three year clock starts but there are some exceptions to the three year rule. If more than 25% of the gross income is omitted from a return then the IRS has six years to access the tax. A recent case shows what can happen.
A S corporation understated its gross receipts on Form 1120S by over $800,000 for each of three years. As a result, its shareholder under-reported income from the firm on Schedule E of his 1040 by the same amount. The IRS caught this after the normal 3 year statute before the 6 year period. The court said that the IRS was correct and the individual owed the back tax.