Oh the dreaded IRS. No one likes the IRS and a lot of people even profess to hate the nation’s top tax authority. That feeling of hate stems in large part from the perception that the IRS appears to be able to do whatever it pleases and taxpayers have little or no power to do anything about it, no matter how unfair or unjust the agency’s actions might be. This latest piece of news will do nothing to help ease those hard feelings towards the taxman. Thanks to a new bill, the IRS will now be getting a little more leeway when it comes to auditing taxpayers.
New Bill Gives IRS More Time
The basic rule has long been that the IRS, for most cases, has up to three years to audit a tax return after it’s been filed. There are exceptions, but for the most part, once three years have passed, you are in the clear. One of the greatest, and most common, exceptions are those cases in which a taxpayer has failed to include more than 25 percent of his or her income. That’s a big no-no and in those cases, the IRS gets up to six years to perform an audit on any given tax return. And recently, Congress gave the IRS a little more power when it overruled the Supreme Court’s ruling that “overstating your tax basis” is different than omitting income, and therefore three years was enough for the IRS.
Announcing H.R. 3236
That’s right, in the new Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (AKA H.R. 3236), Congress changed the tax code to state: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” There is some good news. This change does not apply to old tax returns that have already been closed. However, it does apply to any older returns that are still considered open. The new rule also applies to all tax returns that are filed after July 31 of 2015.
But Wait, There’s More!
There are other aspects of this change that could be a little scary for some. For example, if you never filed a return, then the IRS has no time limit to perform an audit. While most cases involving criminal or civil tax offenses allow the IRS six years to perform an audit, there are some instances where the IRS has no limit. For example, if you forget or leave out some tax forms then the IRS can come back to get you with an audit at any time. The IRS is also very interested in hunting down and putting a stop to anyone who tries to hide money in foreign accounts. The new rules give the IRS six years to audit your return if you omit more than $5,000 in foreign income.
Hold Onto Everything
The bottom line when it comes to your tax returns and being audited is to keep everything. While you may never be in a position to worry about the six-year limit, it never hurts to hold onto a few extra papers for a few more years, just in case the IRS finds something it doesn’t like in one of your returns. So before you hit the shredder just remember, with these new changes, that the IRS could still come knocking and you better be ready to answer.