The importance of understanding and utilizing the statute of limitations when facing a tax audit cannot be understated. If the statute of limitations has expired, the government cannot make a claim against you, saving you time, trouble, and expenses. The main IRS statute of limitations is three years, but it can be extended to six years in cases of substantial understatement of income or omission of more than $5,000 of foreign income. Failure to file important forms, such as Form 5471 for foreign corporation ownership, can also result in an open-ended audit by the IRS.
In California, state taxes are a significant part of what taxpayers pay, with high individual and business tax rates, including aggressive enforcement and collection practices. The California Franchise Tax Board (FTB) has four years to audit, although in some cases, they may have unlimited time for audits. State and federal interactions can be complex, with various scenarios affecting the statute of limitations for audits, including failure to file tax returns or fraudulent returns. Taxpayers who settle with the IRS are obligated to settle with the FTB within six months to avoid an open-ended statute of limitations.
Amending a federal tax return may also require amending a California return within six months if the change increases tax liability. Failure to do so can result in an open-ended statute of limitations for California audits. Taxpayers may receive extension requests from the FTB, which, although likened to giving a thief more time to burglarize your home, are generally recommended to avoid adverse assessments. Limiting the scope of the extension request can help protect against potential audit issues.
In the event that both the IRS and FTB conduct audits, the timing of the audits can impact the outcome. If the IRS audit concludes first and the statute of limitations closes, California may still pursue additional taxes owed based on the IRS audit results. Both the IRS and FTB have appeals processes available to taxpayers, which involve engaging with auditors, appeals offices, and potentially tax courts to contest tax liabilities. California tax disputes may proceed to the California Office of Tax Appeals, where administrative law judges hear arguments from taxpayers and tax authorities.
Understanding the statute of limitations and how it applies to tax audits can help taxpayers effectively navigate potential audit scenarios and protect against extended audit liabilities. By being aware of the rules and regulations set forth by the IRS and FTB, taxpayers can take proactive steps to mitigate potential audit risks and uphold their rights during the audit process. Seeking professional advice and guidance can further enhance taxpayers’ ability to navigate audits and appeals successfully.
