A recent tax court decision emphasized the importance of correctly filing joint tax returns, as a return not signed by both spouses is deemed invalid.
While this might seem like a minor detail, the underlying reason for this ruling is significant: it keeps the statute of limitations open, thereby allowing the IRS to audit previous years’ returns.
The key takeaway extends beyond a simple signature; it underscores the importance of properly closing out past tax returns to avoid prolonged audit risks.
Key Audit Rules To Remember
The Three-Year Rule: The IRS has the authority to audit a tax return for up to three years after it is filed or after the original due date, whichever is later.
The Six-Year Rule: If your income is understated by 25% or more, the audit period doubles to six years. This also applies to understating the value of transferred property.
The Forever Rule: No statute of limitations exists if a tax return is not filed, fraudulent activity is detected, or certain unreported foreign assets are involved.
State Variations: Each state has its own statute of limitations, often extending the federal window by six months to a year to address federal audit adjustments or amended returns.
Amended Returns: When you amend your federal tax return, the IRS generally has 60 days to review the changes, potentially extending the audit window if the amendment is made near the end of the audit period.
Practical Tips For Minimizing Audit Risk
File Promptly
Aim to file your tax return on or before the initial deadline, typically April 15th. Use certified mail or keep e-file confirmations to document your filing date.
However, note that late law changes may necessitate filing an extension, so it’s wise to consult with a tax professional about your situation.
Initiate The Audit Clock
The audit period doesn’t begin until you file your tax return. This was the issue for the couple with the unsigned return – without both signatures, their joint return was not considered filed, leaving an extended audit window.
Understand Audit Extensions
Occasionally, the IRS might request permission to extend the audit period to complete their review. If you decline, the audit period ends, but the IRS may issue a tax bill based on incomplete information.
Seek professional advice before agreeing to any extension.
Know Your State’s Rules
Different states have varying statute of limitation rules. Some states keep their audit periods open indefinitely if you amend your federal return but not your state return.
While the April filing deadline might cause stress, remember it also serves to close the audit window for timely filed prior year returns, helping to protect you from unnecessary scrutiny and prolonged audit risks.
Implement The Three Lines Of Defense Model
According to the Institute of Internal Auditors (IIA), the Three Lines Of Defense Model is founded on the principle that these three layers collaboratively create a framework for effective risk management and internal governance.
It delegates responsibilities for managing risks, particularly in the context of audits. Here’s an overview of the model:
First Line Of Defense: Operational Management
Operational management constitutes the first line of defense and is responsible for maintaining effective internal controls and executing risk and control procedures on a day-to-day basis.
This line includes:
- Management And Staff: They control and manage organizational risks, ensuring compliance with policies and procedures.
- Internal Controls: These are embedded within operational processes, designed and implemented by management.
Second Line Of Defense: Risk Management And Compliance Functions
The second line of defense provides risk oversight and compliance functions to support management.
This line includes:
- Risk Management: Focuses on risk management processes and practices, providing expertise, monitoring, and reporting on risks.
- Compliance: Makes sure the organization complies with laws, regulations, and internal policies.
Third Line Of Defense: Internal Audit
Internal audit provides the highest level of objective review of risk management and internal controls, overseeing the effectiveness of the first two lines of defense.
This line includes:
- Internal Auditors: They conduct audits and reviews to assess the effectiveness of governance, risk management, and control processes across the organization.
The Ultimate Audit Defense: Working With A Tax Professional
The ultimate line of defense is working with a tax professional who can guide you through best practices and minimize your risk of being audited.
At Minton CPA & Associates, our team of experts is dedicated to helping you navigate the complexities of tax compliance.
We not only ensure that your tax returns are accurately and timely filed, but also stand ready to represent you in the event of an audit, providing an additional layer of protection and peace of mind.
Don’t leave your tax matters to chance – reach out to us today for expert assistance. Call us at 757-546-2870 to get the support of a seasoned tax professional.