In April 2011, Dan is audited by the IRS for the year 2009. During the course of
ID: 2374078 • Letter: I
Question
In April 2011, Dan is audited by the IRS for the year 2009. During the course of the audit, the agent discovers that Dan%u2019s deductions for business travel and entertainment are unsubstantiated, and a $6,000 deficiency assessment is proposed for the tax year 2009. The agent also examined some prior-year returns. The agent discovers that Dan failed to report $40,000 of gross business income on his 2007 return. Gross income of $60,000 was reported in 2007. The agent also discovers that Dan failed to file a tax return in 2002. Will the statute of limitations prevent the IRS from issuing a deficiency assessment for 2009, 2007, or 2002? Explain
Explanation / Answer
.During the course of the audit, the IRS proposes additional tax for 2009, because Dan failed to substantiate certain travel and entertainment expense deductions. During the course of the audit, the IRS discovers that Dan failed to file a tax return for 2002 and in 2007 an item of gross income amounting to $40000 was not reported.
The statute of limitations remains open indefinitely if a fraudulent return is filed or if no return is filed. Hence for 2002, deficiency can be assessed.
.A deficiency also may be assessed for the 2007 return because a six-year statute of limitations applies since the omission is more than 25% of the gross income reported on the return.( 40000 is more than 25% of 60000)
The IRS may assess a deficiency for 2009 because the three-year statute of limitations will not expire.