The Internal Revenue Service’s (IRS) rules, deadlines, and restrictions can make tax season even more complicated. The three-year rule is one of the most important. However, many taxpayers do not understand the impact it can have on their financial life.
Consider the IRS’s three-year rule a clock that begins ticking the moment you submit your tax return. This time frame affects all aspects of your tax return, from amending it to claiming a refund. It also determines the length of time you have to keep your boxes full receipts. Understanding this rule could mean the difference between getting a refund and never receiving it.
This rule is often ignored by most taxpayers until they are required to amend a previous return or to claim a refund. When these situations occur, understanding how the three-year tax rule works will help you protect your financial interests, and stay compliant with tax laws.
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What does the IRS rule of three years mean?
The IRS three-year law, also known as the statutes of limitations, gives you a window of three years from the date that you file your return, or whichever date is later. Both you and the IRS are allowed to make changes to your return during this time. You have three years in which to request a refund, if you find out you’ve overpaid. The IRS also has three years during which to audit your tax return and assess any additional taxes they discover.
This rule doesn’t just set deadlines, it also creates a level playing field. The IRS can verify that the returns are accurate while giving taxpayers time to correct any mistakes. The clock starts to tick on April 15, the following year after the tax year unless you have filed early, or has received an extension.
There are some important exceptions. The IRS has six years to review your return if you have underreported your income more than 25%. There is no statute for a person who has never filed a tax return, or has filed a false one. The IRS may knock at any time. The IRS cannot come after taxpayers more than three years later.
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What is the IRS 3-year rule and how does it affect your tax?
The three-year tax rule affects your taxes in a number of practical ways. If you discover that you’ve missed out on valuable credits or deductions, you can amend your return within three years of the date you filed it and claim a refund. If you find out that you were eligible for a credit, but did not claim it, then you can still get a refund as long as the time frame is within three years.
This rule will also determine how long you must keep your tax records. It’s tempting just to throw away everything as soon as you get your refund. However, retaining documents for three years will protect you from an audit. Included in this are W-2s 1099s, deduction receipts and other documentation to validate the information you provided on your tax return.
The three-year rule is of particular importance to small business owners, self-employed taxpayers and other taxpayers. This is because these taxpayers have complex returns, with multiple income and deduction sources. It’s therefore even more important to keep detailed records for the three-year period. Included are business expense receipts and mileage logs as well as documentation for home office deductions.
The Bottom Line HTML0
If you don’t understand the IRS three-year rule, you could lose money. Don’t delay filing your return if you are due a refund. You could lose money you deserve. You can feel more at ease if you are worried about an IRS audit. The IRS has only three years to review your tax return, unless you have significantly underreported income. Consult a tax expert or visit the IRS website if you are unsure if the three-year rule is applicable to your situation.
