In a tax court decision, a judge ruled that a joint tax
return not signed by both spouses is not a validly filed tax return.* This
seems like a simple ruling about the signature line on a 1040 tax form. The
true reason for the ruling; to keep the statute of limitations open to give
the IRS the authority to audit this couple’s prior year tax returns. The
lesson here is not only found on the signature line of the tax return, but
on closing out past tax returns from the possibility of audit.
The rules
Three (3) year rule. The
IRS can audit a tax return for up to three years after the tax return is
filed or the original filing due date, whichever is later.
Six (6) year rule. The
three year audit window doubles if you understate your income by 25% or
more. This includes understating the taxable value of property transferred
to you.
The forever rule.
There is no time limit if you fail to file a tax return, there is
fraudulent activity, or if certain unreported foreign assets are involved.
State rules vary. Each
state has its own statute of limitations. Many states add six months to one
year to the federal window to allow the state time to react to any federal
tax changes due to an audit or amended tax return.
Amended returns. If
you amend your federal tax return, the IRS generally has sixty days to
review the revision. This may add time to the audit window, but only if the
amended tax return is filed near the end of the audit window.
Some tips
Keep the time as short as
possible. Try to file your tax return on or before the initial filing
deadline. For most of us, this is April 15th. Keep records that document
the timing of your filing either by using certified mail or keeping copies
of e-file confirmations. But also be aware there are exceptions to this
rule. Late law changes often create a need to file an extension, so it is
best to discuss your situation.
Start the clock.
Remember, until you file your tax return the audit clock never starts. This
is the problem our couple had with their unsigned tax return. Without both
signatures, the jointly filed tax return was not deemed to have been filed.
So the audit time-frame did not start. This left the taxpayers with a very
large (and expensive) available audit window.
Understand the permission to
extend. On occasion, the IRS may ask you for permission to extend
the audit period. They will do this to buy time to finish an audit. If you
refuse, the audit window is closed, but the IRS may present you with a tax
bill based upon incomplete information. Should this request be delivered to
you, ask for assistance before agreeing to an extension.
Know your state’s rules.
States have different statute of limitation rules. For instance, some
states hold their audit periods open indefinitely if you file an amended
federal tax return, but fail to file an amended state tax return.
While
many look at the April filing deadline with dread, remember each deadline
also closes the ability to audit a timely filed prior year tax return.
* Reifler v. Commissioner,
T.C. Memo. 2015-199
|