In general, the IRS has three years of time to audit after you have filed your taxes. In cases where the taxpayer has omitted more than 25 percent of his income, the three years double up to six years and this error is called the substantial understatement of income.
It also gets doubled up if the foreign income that is more than $5,000 is omitted. The audit by the IRS can also continue up to six years from the date of the original filing.
Will the IRS audit period shorten if the taxes are filed early?
The audit period does not shorten if you file your taxes early The IRS clock usually starts ticking from the date of actual filing. Say for example if your taxes are filed in January and your returns are due on April 10th, the IRS clock will start to tick from April 10th.
In cases where you have not filed a tax return, the IRS does not have a time limit. For tax returns that are unfiled or in case of criminal violations or some fraud, the IRS can take its time. The IRS can take its time in criminal or civil cases even though the time is six years. However, what happens when a few taxpayers miss out on a few tax forms? In these cases, the IRS can audit forever and sometimes,though rarely, they try to reach ten or more years.
It is always recommended to monitor the duration of your audit exposure. It is usually 3 or 6 years. Even though you have filed, and were thinking everything is in place, the statute of limitation never runs. Say, for example, if you have not signed your returns it is not considered a valid tax return and hence, the three years will never begin to run. The tax return is not counted if the penalties of perjury language found at the bottom are altered before you sign.
Say you are a US shareholder and own a part of a foreign corporation, then you must file an IRS Form 5471. It is similar to the signature on your return. Without it, it is not counted as a return. Failing to file will result in penalties. The penalties might go up to $10,000 for a form. There are separate penalties for each Form 5417 that is filed late, incomplete, or inaccurate. Even if there is no tax due on the return, the penalties apply. It might seem harsh but the rules about the limitations are even harsher.
At times when you fail to file Form 5471, your tax return remains open for the audit and the statute expires only after three to six years. This depends on the issue and its importance. In cases related to the missing Form 5471, the IRS not only has an indefinite time to examine and assess the taxes but can also make adjustments to the tax returns without any expiration unless and until the Form 5471 is filed.
Taking an audit exposure into consideration before filing a tax return is considered a better move. The aspect that the IRS can audit forever is appreciable but one thing to be remembered is the possibility for large civil penalties and criminal liability is real.