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 statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.
When does the IRS Statute of Limitations expire?
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.
For example, you filed an extension for your 2014 taxes to October 15, 2015. You file your tax return on July 1, 2015. 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 is July 1, 2018.
Let’s say you file your 2014 taxes on March 15, 2015. The statute of limitations expiration date would then be April 15, 2018, since this is the later of the return filing date and statutory due date.
There are three exceptions to this rule:
- If you understate your income by more than 25% the statute of limitations increases to 6 years.
- There is no IRS statute of limitations on delinquent non-filed returns.
- You sign a consent to extend the statute by signing Form 872
Refund statute of limitations established by IRC 6511.
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.
Let’s take a look at some examples. 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. Therefore, he has until April 15, 2018 to file an amended return to claim a refund.
Bob files an extension to October 15, 2015. He files and pays his taxes on September 15, 2015. He has until September 15, 2018 to file an amended return. When the tax return is filed within the extension period, the refund statute of limitations begins on the actual filing date.
What if you have not filed but are owed a refund due to excess federal withholdings or estimated tax payments? For example, Bob makes a “safe harbor” estimated tax payment on December 31, 2014 and has not yet filed his 2014 tax return. On an unfiled tax return, the IRS has established a 2 year rule for filing a return in order to claim a refund. So in this case, Bob has until December 31, 2016 to file his tax return to get his refund.
10-year statute of limitations on collections.
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.
Here’s an example to show how the assessment statute and collections statute work together. Bob files his 2014 return on April 15, 2015 but forgets to include stock sales on his return. The IRS has until April 15, 2018 to assess tax on the unreported income and file a lien or levy. And the IRS assesses taxes and starts wage garnishment on April 15, 2016 after sending Bob numerous tax notices which he ignores. The IRS can continue wage garnishment until April 15, 2026, or until the balance has been paid off.
Note that the above rules are just general applications of the statute of limitations. There are numerous exceptions to these rules. If you are under audit, it is important to find a qualified attorney to prevent the IRS from going beyond the statute of limitations, or even to minimize how far back the IRS will audit within the statute.