Audit roulette is not as inevitably deadly as Russian roulette, but if you wind up getting audited, you might feel the difference between the two is not significant. Audit roulette is when a taxpayer knowingly underpays the Internal Revenue Service and then holds their breath, wealthmanagement.com notes.
How long must they watch the clock and hold their breath? It depends. The IRS limitations period varies in different circumstances. The general limitations period is three years. However, there are exceptions carved out by the IRS for substantial underpayments by taxpayers (in these cases the limitations period is doubled to six years).
The clock starts when you file your return.
It should be noted that in cases of fraud or fraudulent tax returns, there is no limitations period whatsoever. When the intent is to evade taxes, those taxes can be assessed at any point. A year from now, 10 years from now or any point beyond that.
The real question in matters of fraud is whether the taxpayer is innocent of wrongdoing or wasn’t involved in the preparation of the bogus tax return.
The folks at wealthmanagement.com note that courts have repeatedly pointed out that it doesn’t matter much if a taxpayer had fraudulent intent. Even if a preparer cooked up a fraudulent return without the taxpayer’s knowledge, the limitations period does not apply. However, the website adds that in BASR Partnership v. United States, the Court of Appeals said if a taxpayer does not participate in the preparation of a fraudulent return, the limitations period can’t be extended beyond six years.
The case gave hope to taxpayers who are accused of filing a fraudulent return, but were not involved in the preparation of the return. An experienced tax attorney can help you understand how the taxpayer-friendly ruling might apply in a case of a fraudulent return.