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Statute Of Limitations Is Not Always Three Years - By John R. Bullis, CPA

Updated: Feb 21, 2023

The usual time IRS can audit a return is three years from the date the return is filed.

However, if more than 25% of gross income is not reported on the return, IRS has six years to mail a notice of deficiency. If the return is never filed or fraud is involved, the return is always open to IRS audit.

Mr. and Mrs. Manashi received a Notice from IRS about gross income from his S corporation (he owned 100%) not being reported correctly.

It seems they had three bank accounts: a business account and two personal accounts. The return for the S corporation only reported the deposits to the business account, but Mr. Manashi deposited some of the corporation receipts into the personal accounts.

Since the 2006, 2007 and 2008 returns omitted large amounts of income, the six year Statute of Limitations applied. IRS could audit and issue a deficiency notice anytime in the six years after the date the returns were filed or the due date of each return.

U.S. Tax Court Memo decision 2018-106 of July 5, 2018 held IRS sent the deficiency notices within the six years.

Mr. Manashi agreed to the omission of gross receipts and that the IRS notices were sent within the six year periods. But he argued the forms 1099 from the business clients should have alerted IRS to the understatements of gross income. Since it appears no forms 1099 were issued by the clients or the banks and no forms 1099 were attached to the returns (to alert IRS), the court found the six year Statute of Limitations applied. The IRS notices were valid.

It is not clear why this even went to tax court. It was clear that the IRS notices were valid. What a waste of time and money for both the government and the taxpayers. Mr. and Mrs. Manashi represented themselves at tax court, they did not have an attorney.

The amounts not reported were $800,164; $849,795 and $810,490 respectively for years 2006, 2007 and 2008.

If they had met with a tax attorney or CPA, it would have been explained why IRS was right and the court case would not have happened.

Did you hear “I never thought about losing, but now that it’s happened, the only thing to do is do it right…We all have to take defeats in life.” Muhammad Ali, Former professional boxer.

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