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As a general rule, the IRS has 3 years from the April 15 due date of the tax return, or its extended due date to October 15, to assess any additional tax that may be deemed payable. This same time period in the statute also gives to taxpayers the opportunity to correct their income tax return by filing an amended return for whatever unreported income, over-reported income, unreported deductions, and over-reported expenses. There is actually no law that obligates the IRS to accept an amended return. It is a matter of legislative grace that an amended return could be accepted and/or processed. When the IRS wants to assess additional taxes when the assessment statute is about to expire, it would normally request the taxpayer to waive the statute and extend the assessment date. In some cases, however, the statute could be extended for up to six (6) years, but only when the additional tax liability would increase by 25% more or when the income that was under-reported in the tax return was at least 25% more. The law also tells the taxpayers however that in case there was fraud, this 3 year statutory time limit does not apply. The IRS can thus assess additional taxes for any tax year without being barred by the statute of limitation. It can do an audit as far back as it may decide without limit and make tax assessments. We could marvel at the hidden reciprocal wisdom in this statute that clients we believe may leverage for their own tax benefit. A taxpayer may thus understate income by design to pay less tax to start, and then contemplate to amend the tax return later to pay the supposed tax within the 3-year statute. Reporting the extra income or reporting the extra expenses or tax deductions later on would still be a legal and an acceptable concept. Be forewarned though during this exposure of the potential that the IRS could assess additional taxes and statutory penalties and interests that could run as high during the wait time. But only during an IRS tax audit or examination on less than 1% of the taxpayers. The audit probability is rather low. It makes this 3-3-3 loophole co-exist in our current tax system. But then audits could also be financially harmful. Three (3) years of tax returns at least could be examined. And it could happen on a routine, DIF-score selected or national research project audits we can defend. Let us look once again at the scenario: what if the taxpayer under-report first his income, or increase his deductions or expenses if only to pay less taxes, with the expectation to amend the tax return to report more income or more expenses correctly in 3 years. But then also what if he was not able to make such corrections after the 3 year statute has expired, (and the IRS has not audited within the statute) would he have then benefited from this 3-3-3 tax loophole and thus saved on his taxes? While we do not recommend taxpayers understate or under-report their income, or over-state their expenses and tax deductions at first temporarily, some clients may find some underlying wisdom in Amending the Tax Return 3-3-3- Strategy in difficult times that is still legal. Yes, there are risks and dangers involved in this discretion that some clients might not be willing to take. Do not do this without the help of a tax professional. It is one of our Tax Management Analytics tools for client discretion. That critical decision will be up to the taxpayer. We have ALWAYS insisted the taxpayer must correct and amend the tax return. But the pros and cons the clients should evaluate. When a client decides not to amend the return, the potential tax liability we believe/suggest should not be more than $50,000 dollars, and certain Tax Audit Management Discretions must be implemented under our guidance. Call my office if you might need any help to make other collaborative tax management discretions for your best interest. We could help you make wise decisions.
(Angel Y. Dayan, CPA, EA, ABA, ATA could be reached at (213)-365-1040 for an appointment. He has a Masters Course in Tax Defense Representation and Advanced Studies in Tax Practice and Procedures. Website: