The Internal Revenue Code (IRC) contains time periods within which the IRS must assess and collect tax. These limitations are known as “statute of limitations.” Section 6501(a) of the IRC states that an assessment of any income tax must be made “within 3 years after the return is filed.” This applies even if a return is filed late.
However, there are exceptions to the 3 year statute of limitations:
- False, fraudulent, and unfiled tax returns. There is no statute of limitations where a taxpayer files a false return, engages in a willful attempt to evade tax, or does not file a tax return.
- A return is filed with a substantial omission of income. The IRS may assess taxes within 6 years of a tax return filing where the taxpayer omitted more than 25% of the reported income for the year under examination.
Example 1: Bob files his 2014 tax return on 4/15/2015. The IRS has until 4/15/2018 to audit and assess any additional taxes on the return, absent fraud or more than a 25% omission of income.
Example 2: Bob files his 2011 tax return on 4/15/2012. Bob’s 2014 tax return is audited by the IRS and after reviewing his bank statements, the IRS discovers that he underreported his income by more than 25% in 2014. The IRS now has until 4/15/2018 to audit his 2011 tax return.