Tax Law Insights

South Carolina generally follows federal law for purposes of the assessment of tax, including time limits on which taxes may be assessed (statutes of limitation). The South Carolina Department of Revenue (SCDOR) generally has 36 months from the date an original return was filed or due to be filed (whichever is later) in which to assess additional taxes. S.C. Code Ann. § 12-54-85(A). An important exception concerns substantial understatements of tax, however.

For federal purposes, an extended 6-year statute of limitations exists for substantial omissions of income - where a taxpayer omits more than 25% of the income reported on his/her/its tax return. Under South Carolina law, however, a 6-year (72 month) statute of limitations on assessment applies where there is a 20% "understatement of the total of all taxes required to be shown on a return or other document." SC Code § 12-54-85(C)(3). South Carolina also has an extended statute of limitations for assessment if SCDOR receives information from the IRS that the IRS has assessed additional taxes after the 36 month limitation. SC Code § 12-54-85(D).

Taxpayers in South Carolina should not be lulled into thinking that by waiting for 3 years from when their state return is filed that they are immune from SCDOR audit. If SCDOR comes to audit and finds that a taxpayer understated 20% or more from the tax reported on a return, SCDOR can not only audit the most recent 3 years (36 months), but can go back and potentially audit and assess additional taxes (and penalties and interest!) for 6 years back (72 months).