IRS Statute of Limitations

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IRS Statute of Limitations

What is an IRS Statute of Limitations?

IRS statute of limitations are time periods established by law to review, analyze, and resolve taxpayer and/or IRS tax related issues. The Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specified limits. Once the applicable statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.

When does the Statute of Limitations expire?

1. IRC § 6501 general rule for tax assessment – 3 years

On an individual tax return, the statute of limitations for the IRS to assess additional tax or initiate collections action is 3 years after the original due date of the return, or 3 years after the date the return was actually filed, whichever is later. IRC 6501

For a return filed before the statutory due date (usually April 15 unless it falls on a weekend or holiday), the statute begins on the statutory due date. If a return is filed within a period of extension or after, the IRS statute of limitations begins on the actual filing date.

Example 1: Bob files his 2014 tax return on July 1, 2015. There was no extension filed. Since the return statutory due date was due April 15, 2015 and July 1, 2015 is later than the statutory due date, the statute of limitations expiration date for tax assessment is July 1, 2018. 
Example 2: Bob  files his 2014 tax return on March 15, 2015. The statute of limitations expiration date for tax assessment would then be April 15, 2018, since this is 3 years from the later of the return filing date and statutory due date.

Situations where the statute of limitations period is disregarded:

  1. IRC 6501(c)(1) Filing a false or fraudulent return with the intent to evade tax – the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.
  2. IRC 6501(c)(2) Willful attempt to evade tax – the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
  3. IRC 6501(c)(3) No return is filed – the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.*

*Administratively, the IRS has taken a softer stance in its Policy Statement 5-133 which states that in some cases delinquency procedures will not be enforced for a longer than 6 year period of delinquency. This is probably a practical decision to forego tax assessment in periods prior to the 6 years where there is not significant anticipated revenue, no income from illegal sources, and where the time and effort to collect the tax might be a significant burden on the Service. IRM 1.2.14.1.18 (Policy Statement 5-133).

Situations where the statute of limitations period is extended:

  1. Extension by agreement: this is usually found in situations where the tax return is under audit and the IRS needs additional time to conduct the audit and assess any additional tax. IRC 6501(c)(4)
  2. Failure to file certain international information reporting forms (e.g., 8938, 5471, 5472, 926, etc): the period for assessment of any tax relating to such returns where the international reporting form was not provided is s 3 years after the date on which the IRS is furnished the information required to be reported under such section. If no such form is filed, the statute would not begin to “run” until it is filed. IRC 6501(c)(8).
  3. Substantial omission of items: if the taxpayer omits taxable income and the amount of the income is more than (i) 25% of the gross income stated on the return or (ii) the income is excess of $5,000 and from a specified foreign financial account, the statute is extended to 6 years from the date of filing or the statutory due date, whichever is later. IRC 6501(e)(1)(A)

2. Refund statute of limitations

A claim for refund must be filed within 3 years from the time the return was filed or 2 years from the date tax was paid, whichever is later. And if no return is filed, then 2 years from the date payment was made. Secondly, the IRS may refund only the amount of tax paid within three years plus the period of any extensions, or two years from the date of payment. IRC 6511

Example: Bob files his 2014 tax return on March 15, 2015 and pays his tax balance on the same date. Subsequently, Bob realizes that he forgot to include some expenses for his home business. His 3 years begins to run from the statutory due date of April 15, 2015, or April 15, 2018. His 2 years begins to run from the tax payment date of March 15, 2015, or March 15, 2017. He therefore has until March 15, 2017 (the earlier of March 15, 2017 and April 15, 2018) to file a claim for refund. 

3. Statute of limitations on collections – 10 years

Generally, the IRS may only attempt to collect unpaid taxes for up to 10 years from the date they were assessed. After this period, the IRS must cease any collections activity. IRC 6502(a)

A number of events can extend the collections statute expiration date (CSED) such as:

  • Bankruptcy proceedings – CSED is suspended while the Service is prohibited by reason of the case from collecting, and for six months thereafter
  • Judgment/litigation – a court action brought against the taxpayer prior to the expiration of the collection statute extends the period to collect until the tax liability or judgment against the taxpayer is satisfied or becomes unenforceable.
  • Filing a CDP hearing (but not an equivalent hearing) – the CSED is suspended from the date the Service receives a timely filed request for a CDP hearing to the date the taxpayer withdraws their request for a CDP hearing or the date the determination from Appeals becomes final, including any court appeals.
  • Requesting an offer in compromise – the CSED is suspended while the offer is pending with the service, for 30 days immediately following the rejection of an offer, and for the period that a timely filed appeal of a rejection is being considered in Appeals.
  • Partial Payment Installment Agreements – the CSED is extended during
    • The time the proposed installment agreement is pending,
    • Thirty days following the rejection of a proposed installment agreement,
    • Thirty days following termination of an installment agreement, and,
    • Any appeal of the termination or rejection of the installment agreement.
  • Taxpayer living outside the U.S. – The period of limitations on collection after assessment is suspended while the taxpayer is outside the United States if the absence is for a continuous period of at least six months per IRC 6503(c).