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Tax Statutes of Limitations for IRS Audits, Tax Refunds, Collection and More

A statute of limitations (SOL) is a law which sets a certain date, after which a party is barred from enforcing their rights.  For example, generally, in New York, a person has three years from the date of injury to sue the party that injured them.

Thus, a SOL is basically a clock, an hourglass if you will, that will eventually run out of sand with the passage of time.  When the sand is gone, the ability to file the law suit, or make the arrest, or assess the tax is gone.

When attempting to use a SOL as a defense, the defender must know what action or date started the clock and how long the clock must run before the SOL expires.  However, the defender must be wary. Many actions taken by taxpayers toll or suspended the running of the clock, and one may think the SOL has expired, when in reality it has not.  This could result in the defender showing their cards too soon and losing a golden opportunity to get away with murder (note murder has no SOL).

The Internal Revenue Code (26 U.S.C.) contains many SOLs, and although rare, the IRS does blow an SOL occasionally.  Thus, whenever dealing with the IRS, is it wise to know the applicable SOL for whatever issue is under scrutiny and make sure that the IRS still has time to press their rights.

3 Years

Normal assessment period

The making of a tax assessment = 3 years from the due date of the tax return (if filed early or on time) or from when the return was actually filed (if filed late).

This is the general audit SOL.  The typical taxpayer files a return on or before April 15 annually.  The taxpayer’s return reports whatever the taxpayer put down on it.  If the IRS chooses that return for examination (audit), then the IRS has 3 years from the due or filing date to create an audit assessment.

Note:  If no return is filed, the 3 year clock does not start to tick.

Refund claims

Must be made within 3 years from the due date of the return, or within 2 years from the date the payment was made, whichever is later.  This law can bite a taxpayer that has discovered that he or she overpaid a tax in a prior year.  You have just 3 years from the due date of the original return to file an amended return and get a refund of that prior paid tax.

6 Years

Substantial Understatement  

If the taxpayer fails to report a substantial amount of income, then the IRS has 6 years (instead of 3 years) to create an audit assessment.  Here, the taxpayer must have failed to report 25% or more of his or her total income.  For example, a taxpayer reports $75,000 of income.  His or her actual income is $93,750 or more.  The IRS has 6 years to examine that return and create an audit assessment (25% of $75,000 = $18,750) ($18,750 + $75,000 = $93,750).

Offshore Accounts

New IRS law §6501(e) grants the IRS 6 years to create an audit assessment if the taxpayer had a foreign asset, like a bank account, and the amount of income derived from that (those) assets exceeded $5,000.

Crimes

Most of the federal tax crimes, such as defrauding the U.S., tax evasion, failure to pay tax, failure to file a tax return, have a 6 year SOL from the date of the commission of the crime.

10 Years

Collection

Generally, the IRS has 10 years from the date a tax is assessed to collect that tax by levy or lawsuit.  Several actions taken by taxpayers can halt the running of this 10 year clock.  For example, filing bankruptcy, submitting an offer-in-compromise to the IRS, filing certain collection appeals, and filing an innocent spouse relief request will stop the 10 year clock while these actions are pending.  Additionally, more time is usually “tacked” on to the 10 year clock as an added consequence to taking these types of action.  For example, the 10 year clock is stop for the period of time a taxpayer is in bankruptcy, plus six months.

Knowing these and other statute of limitations can greatly assist taxpayers that are in the sights of the IRS.  If you have an IRS problem make sure you know these limitations and what your other rights as a taxpayer are.

 

 

 

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