The obligation to accurately report income taxes to the Internal Revenue Service is squarely on the shoulders of the taxpayer. However, the term “accurate” is the essential element here.
Consider taxpayers who have their own businesses, whether a Sole Proprietorship (Schedule C), flow thru entities such as Partnerships or S Corporations, or C Corporations. The mere declaration on these business returns of merely reporting the correct net income (bottom line) is not sufficient. The Internal Revenue Code has many statutes regarding the “Statute of Limitations” which quite simply means the time that IRS must select your return for audit, and thus attempt to make additional tax assessments against the taxpayer. This tax Code section 6501 has many parts to it.
The general rule, per the Code is the three year time frame for the IRS to audit and assess. This three year period is three years from the later of the original due date (usually April 15th) or later if the return is filed after April 15th , such as returns on extension or late filed returns. However, there are many twists an nuances to the Code section. One exception is failing to file a return or filing a “false” return. In these cases, the IRS has no time limit to audit and assess. Failing to file is a simple concept which means a taxpayer never files a return that is otherwise required to be filed.
A “false” return means substantial incorrect figures, which basically encompasses tax evasion. Mere over estimates of deductions, by estimating certain expenses, within a reasonable degree, for which the taxpayer has a reasonable basis, is not usually a basis to keep the statute open ended.
Another area that could extend, but not indefinitely extend, is under reporting gross business income by more than 25%. So, should a taxpayer not have exact figures on the net business income the taxpayer is advised not to merely estimate the net income but rather is advised to gross up sales and then list each type of expense. As an example, if a business return estimates the gross income/sales as $100,000 and expenses of $20,000 producing a net income of $80,000 but if IRS examines this return and finds that the summation of this net income is actually gross sales of $130,000 (with possible expenses of $50,000 (which still produces the same net income of $80,000)) IRS may invoke sub section 6501(e) under the Code. This is because the “gross income” or “gross sales” were under-reported by 30% ($30k not reported divided by $100k of sales reported). So, even if, at first glance, there may not be any change to the “bottom line” you are stuck with this examination and after almost six years it is much tougher to recall and compile receipts to support your expenses, much more than it would have been only after a three year period.
So, when filing your returns, each aspect of the return must be properly reported.