Taxpayers often tend to think that the Internal Revenue Service (IRS) can collect taxes from an individual until the day they die. Fortunately, the IRS has a statute of limitations which governs the deadlines for IRS and taxpayers actions.
The team at AG Tax has prepared a brief summary on this statute of limitations and its exceptions, which may prove useful to U.S. taxpayers.
IRS Statute of Limitations
The IRS has a three year period to issue a refund or audit a tax return, while they have ten years to collect any unpaid taxes. This law is known as the statute of limitations. The statute of limitations puts a time limit on almost every tax-related action of taxpayers and the IRS.
Key statutes of limitations
• 3 years for IRS audit (IRC 26 U.S.C. § 6501): Any tax can be re-assessed by the IRS within three years after the tax return was filed by the taxpayer, whether or not the return was filed on or after the date prescribed. Beyond this, the IRS may not initiate any court proceeding for the collection of any tax.
• 3 years for refund (IRC 26 U.S.C. § 6511): A taxpayer may file a claim for a refund of an overpayment of any tax within three years from the time the tax return was filed or two years from the time the tax was paid, whichever happened last. In case no tax return was filed with the IRS, the claim may be made within two years from the date that the tax was paid to the IRS.
• 6 years for IRS audit (IRC 26 U.S.C. § 6501(e)): The three year audit period can be extended by an additional three years, to give a total six year re-audit period, if the taxpayer omitted the following in their tax return:
– Income of 25% or more of the gross income stated in the tax return filed with the IRS.
– More than $5,000 of income from foreign financial assets disclosure.
– Qualifying items of 25% or more of the gross estate disclosed on Form 706 (U.S. Estate & GST Tax Return)
– Gifts worth more than 25% of the total gifts disclosed on Form 709 (U.S. Gift & GST Tax Return)
• 10 years for IRS collections after assessment (IRC 26 U.S.C. § 6502): The IRS has a time limit of 10 years in which to attempt to collect any unpaid taxes. The IRS tries its best to get an individual to pay as much as possible before the deadline (or otherwise agree to extend it), since once the 10 year period ends, it has to stop its collection efforts. The 10-year period starts from the date:
– A taxpayer receives a written notice or levy from the IRS regarding the unpaid taxes as per their tax return.
– In case, no tax return is filed, the IRS can create a substitute return and make a deficiency assessment, thus starting the ten year period.
Exceptions to the statute of limitations
As there are defined time-limits which govern the actions of the IRS and taxpayers, a set of rules also exist which nullify the statute of limitations. These are:
• If the tax return was prepared by the IRS because the taxpayer failed to make a return and agreed to disclose all relevant information to the IRS for the preparation of the return. Such a tax return by law should be considered authentic and sufficient for all legal purposes; thereby an audit as per the statute of limitations is inapplicable.
• If a false tax return or fraudulent tax return was filed with an intention to evade any tax, the statute of limitations on audits and assessing additional tax remains open forever.
• The tax may be assessed at any time or a proceeding in court for the collection of such tax may be started without assessment if a taxpayer fails to file a return.
• The refund claim period may be extended to seven years if the tax refund relates to a bad debt, or is in connection with a loss from a worthless security, and 10 years from the date prescribed by law if it relates to foreign tax credit with regards to foreign taxes paid or accrued.
• The three year statute of limitations for refund does not apply in the situation where taxpayers are unable to manage their financial affairs due to physical or mental impairments, unless they have a guardian authorized to act on behalf regarding financial matters.
• The 10-year statute of limitation period may be extended by agreement signed between the taxpayer and the IRS before the expiration of the 10 year period or if the taxpayer entered into an agreement with the IRS related to installment payment due to offer in compromise or innocent spouse tax relief.
Every state may have its own statute of limitations. For example: California has no statute of limitations on the collection of back taxes.
It is always in a taxpayer’s best interest to consult a tax professional regarding his/her tax situations, since various tax planning measures can be taken.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
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- Estate Planning, Inheritance tax advice
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