Supreme Court to decide IRS Audit Time Limits

[kpangelinan]

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.

When you do it for the IRS, you indirectly do it for the taxpayer as well as it's just another tool to curb fraud which increases revenue for the US (and you can fill in the blanks on how that helps the US and the economy). I'm not siding, just think that it would tip the scales for the better good over the long run. We all have our opinions on whether one part of the code makes things better or worse, but without actual data after it's passed, you really never know and can only speculate as I have.

I am all for everyone paying their just due however, I think that if they are going to continue going back further than 3 years under any circumstances then they should allow the refund to be used (on late filings) for these purposes even if they won't refund in cash.

Agreed.

Just to keep this alive and because I sometimes like stirring the pot, I wouldn't support the 6 year rule even IF it included refunds. The downside woud be much greater than the upside.

Maybe. But like I said, you just never know.

[JohnH]

Just to keep this alive and because I sometimes like stirring the pot, I wouldn't support the 6 year rule even IF it included refunds. The downside woud be much greater than the upside.

[S T]

Read Koss' Post

Koss' post outlined

This will not be the norm - it is only for substantial under reporting

So for that I guess so - not sure-- I don't have a decision - I hope for my client's or for potential clients there is no "substantial under reporting" Guess we have to find out what those terms are and what that actually means

For the norm - No I do not want the 6 year rule if we don't have a 6 year rule to file for "delinquent" filings and obtain refunds.

Sandy

[taxea]

I am all for everyone paying their just due however, I think that if they are going to continue going back further than 3 years under any circumstances then they should allow the refund to be used (on late filings) for these purposes even if they won't refund in cash.

[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.

[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.

[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]

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'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'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]

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.

[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]

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.

[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]

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