Individual Tax Statute of Limitations

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  • #195400
    pfitz092
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    Question based on Becker question from R2 Module:

    On April 15, Year 2, a married couple filed their joint Year 1 calendar-year return showing gross income of $120,000. Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the lnternal Revenue Service assert a notice of deficiency before the statute of limitations expires?

    a. April 15, Year 5.

    b. December 31, Year 4.

    c. April 15, Year 8.

    d. December 31, Year 7.

    Choice “c” is correct. April 15, Year 8 is the last day for IRS to assert a notice of deficiency before the statute of limitations expires, six years after due date because gross income was underreported by more than 25% (45,000 ÷ 120,000).

    I understand that the limit is 6 years when gross income is underreported by 25% but I was thrown off by the fact that the question states “Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable”. The textbook states that the 6 year limit does NOT apply to good faith mistakes that result in gross income understatements in excess of 25%.

    Does this rule not apply when a tax professional prepares your return? Or does the answer instead have something to do with the fact that “No information with regard to this omitted income was disclosed on the return or attached statements”? I thought the statue of limitations would be 3 years in this case because the question clearly states that it was a good faith error.

    Help? Thanks!

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  • #681831
    Anonymous
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    I don't know the IRS's exact rules, but I work as a tax auditor for a state revenue department. Our statute is 6 1/2 years for 25% omission, whether or not it was a “good faith error.” As a cynical auditor, I could see every taxpayer claiming “good faith errors” every time there is 25% omission.

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