Keeping good records is an important part of filing accurate income tax returns. Records should be retained even after taxes are filed, in case of an audit or if a correction needs to be made to a return. However, depending on the circumstances, there is a period after which no audits may be filed or corrections may be made concerning a tax return. This period is known as the statute of limitations. The statute of limitations on income tax returns varies.
If you discover a mistake on a tax return that already has been filed, you should file Form 1040X--amended tax return. If Form 1040X is filed to receive a refund, the statute of limitations is three years after the year the original tax return was filed, or two years after the tax pertaining to the affected return was paid, whichever is later.
If you fail to report all the income you have earned for a particular year, you may be subject to an audit if the income is discovered by the IRS. In most instances, the statute of limitations for an audit concerning underreported income is three years from the year the income should have been reported on the tax return of the person who earned it. However, if the amount of income that is not reported is more than 25 per cent of the gross income that was actually reported, the statute of limitations for an audit is extended to six years from the year in which the income should have been reported.
For taxpayers who are subject to employment tax, keeping good records is especially important. The IRS also may audit an income tax return to determine if additional employment tax should be paid. The statute of limitations for an audit concerning employment tax payments is four years from the year the tax should have been paid.
Claims for Losses and Bad Debts
Claims for losses from worthless securities are subject to an audit by the IRS. This is also true for claims pertaining to bad debts. The statute of limitations for claims pertaining to losses or bad debts is seven years from the date the loss or bad debt was claimed on the individual's income tax return.
Failure to File a Return or Filing a Fraudulent Return
If you fail to file a tax return at all, you are subject to an audit at any time, if and when the IRS discovers you have not filed a return. This is also true if you file a fraudulent return; the IRS can audit you at any time after the fraudulent return is discovered. There is no statute of limitations for audits pertaining to fraud or failure to file a tax return.