Supreme Court to decide IRS Audit Time Limits

[taxea]

This is something we all need to keep an eye on:

http://www.forbes.com/sites/robertwood/2011/09/29/supreme-court-to-rule-on-irs-6-year-audit-push/

[veritas]

Words mean something

This is something we all need to keep an eye on:

http://www.forbes.com/sites/robertwo...ar-audit-push/

Excerpt from Home Concrete & Supply v. U.S.

"Lawyers of course are adept at finding ambiguity, and language
of course is by its nature imprecise. One need not consult
a dictionary, however, to understand that the plain
meaning of "omit" is "to leave out" or "to fail to mention."
The taxpayers here did not omit, leave out, or fail to mention
their transaction. Instead, they provided the details on their
returns. See Majority Op. at 4. To be sure, the IRS asserts that
the returns overstated Home Concrete’s basis and thus understated
the overall tax liability resulting from the sale of its
assets. But as the Court noted in Colony, if Congress had been
concerned with that problem, "it could have chosen another
verb such as ‘reduces’ or ‘understates,’ either of which would
have pointed significantly in the Commissioner’s direction."
Colony, 357 U.S. at 32."

[Snaggletooth]

Corporate Bonanza

Many corporations and small businesses have not had profits for three years in this recession. If they prevail, will this give IRS the license to go back and plunder into more profits instead of wasting time in recent losses?

[taxea]

I am not so concerned with the details of this particular case as I am as to whether the SC rules that the IRS is subject to the three year tax rule or whether the SC allows them to continue to expand the 3 years to 6years or even 10 as they have been doing.

[kpangelinan]

I always thought the 3 years was short anyways. I think this is a good thing overall.

[taxea]

I always thought the 3 years was short anyways. I think this is a good thing overall.

In one respect I suppose I agree with you, however, considering they only allow three years to file why should they have more than that to audit?

[kpangelinan]

In one respect I suppose I agree with you, however, considering they only allow three years to file why should they have more than that to audit?

I hear ya.....but just like with other parts of the code that favor the government and not the taxpayer, I guess this would just be another one. For example, the IRS has a 10 year statute to collect on an assessment, but the taxpayer only has a 3 year statute on receiving a refund.

[Koss]

Three Years vs. Six Years

This case is about a very specific issue. The general rule that the IRS can only go back three years when conducting standard audits is not really under attack. The three-year limit, in general, is not going to change, regardless of how the Supreme Court rules in this case.

This case is about the interpretation of the rule that allows the IRS to go back six years when there is a substantial understatement of income.

The core definition of substantial understatement of income does not appear to be in dispute. In this context, substantial understatement of income means omitting more than 25% of your income from the tax return.

The question that the Supreme Court has agreed to address is actually very simple:

Is an overstatement of basis equivalent to an understatement of income?

The appeals courts are split on this issue.

If I overstate the basis of an asset that I sold, but I accurately report the sales price, the final result is that I am still reporting income that is much lower than it should be. But understating the basis is somehow qualitatively different than failing to report income. By accurately reporting the sales proceeds, the taxpayer has arguably reported all income correctly.

Put another way: Does the term understatement of income apply to:

Total Income (e.g., line 22 of Form 1040)?
Adjusted Gross Income?
Gross proceeds from the sale of an asset?
Net proceeds from the sale of an asset?
Net taxable gain or loss from the sale of an asset?

The case before the US Supreme Court hinges exclusively on this question. Regardless of how the Court rules, the three-year limit will continue to apply when there is NO substantial understatement of income. The six-year limit will continue to apply when there IS a substantial understatement of income that is NOT associated with basis reporting.

BMK

[kpangelinan]

This case is about a very specific issue. The general rule that the IRS can only go back three years when conducting standard audits is not really under attack. The three-year limit, in general, is not going to change, regardless of how the Supreme Court rules in this case.

This case is about the interpretation of the rule that allows the IRS to go back six years when there is a substantial understatement of income.

The core definition of substantial understatement of income does not appear to be in dispute. In this context, substantial understatement of income means omitting more than 25% of your income from the tax return.

The question that the Supreme Court has agreed to address is actually very simple:



The appeals courts are split on this issue.

If I understate the basis of an asset that I sold, but I accurately report the sales price, the final result is that I am still reporting income that is much lower than it should be. But understating the basis is somehow qualitatively different than failing to report income. By accurately reporting the sales proceeds, the taxpayer has arguably reported all income correctly.

Put another way: Does the term understatement of income apply to:

Total Income (e.g., line 22 of Form 1040)?
Adjusted Gross Income?
Gross proceeds from the sale of an asset?
Net proceeds from the sale of an asset?

The case before the US Supreme Court hinges exclusively on this question. Regardless of how the Court rules, the three-year limit will continue to apply when there is NO substantial understatement of income. The six-year limit will continue to apply when there IS a substantial understatement of income that is NOT associated with basis reporting.

BMK

Thanks for the clarification. What's reported in the news and on online articles that I've glanced over is quite different.....the media is making it out to be the extension of the standard 3 year statute for examinations.

I didn't know either....just haven't read or researched it more thoroughly than you have apparently.

I still think 6 years wouldn't be a bad thing for a new standard.

[JohnH]

I'm puzzled by this. Why would you be in favor of extending the 3-year SOL to 6 years? How would that benefit your clients?

[kpangelinan]

I'm puzzled by this. Why would you be in favor of extending the 3-year SOL to 6 years? How would that benefit your clients?

I didn't suggest it so my clients will be free of additional years of exposure.....the reason for the examination term is to be able to catch the cheats and the dishonest.....does this mean, maybe the random audit clients (our clients) may have to endure a little more cost for an accountant or aggravation? Yes, a little more, but it's for the good of the country in general and if the clients are on the up and up, their only dissatisfaction of a longer statute would be for inconvenience or aggravation and cost, correct?

[JohnH]

I wasn't sure if I was getting your point, but apparently I did understand correctly. No, I'll have to respectfully disagee with you. I don't see my role as a cheerleader for the IRS. They have more than adequate resources to do the job they need to do.

To follow up on the logic, why not just eliminate the SOL altogether? That way, the IRS will have unlimited time to be sure that every penny is collected. And nobody, taxpayer or tax preparer, will every have any closure on their tax filings, interest, or potential penalty exposures. All done for the good of the country in general, of course...

[kpangelinan]

I wasn't sure if I was getting your point, but apparently I did understand correctly. No, I'll have to respectfully disagee with you. I don't see my role as a cheerleader for the IRS. They have more than adequate resources to do the job they need to do.

To follow up on the logic, why not just eliminate the SOL altogether? That way, the IRS will have unlimited time to be sure that every penny is collected. And nobody, taxpayer or tax preparer, will every have any closure on their tax filings, interest, or potential penalty exposures. All done for the good of the country in general, of course...

I hardly think extended the SOL 3 more years is "cheerleading for the IRS". That is reaching in my opinion.

And eliminating the statute alltogether? I'm going to assume that you're just being sarcastic to prove some point, cause it sounds like you're either all in or all out!

There's a balance for sure.....and I, arguably, fight for my clients as hard if not harder than everyone on this board and have been for 15 years. I don't think adding a few more audit years is tipping the scales of inbalance.

[JohnH]

Guess we will just have to be on opposite sides here. Omitting my sarcasm and sticking strictly to the issue, I think it would definitely tip the scales far in the wrong direction.

[Snaggletooth]

Won't Help

Extending the SOL won't help anyone, not even IRS. If it were 10 years, they would at this juncture be auditing 2001 returns instead of 2008 returns. DCAA (Defense Contract Audit Agency) has no such SOL and contracts as old as 2003 and 2004 are still being held hostage to contractors. If DCAA had a SOL they would have to "give up" and allow contracts this old.

And whatever happened to the government exempting itself from the very laws they pass for the rest of us to pass? Those of you who believe extending the SOL for the IRS and not for the taxpayer should never complain about our Congress. They exempted children of congressmen and senators from having to pay back student loans. They exempted themselves from Obamacare before it ever got off the authors' table.

Extending the SOL? If you're going to do it, do it for taxpayers as well as IRS.