What is the Statute of Limitations?
The Internal Revenue Code limits the time in which the government may assess tax. There are two civil statutes of limitations. The first is the period during which the IRS can assess an additional tax liability (including penalties and interest). The second is the period during which the IRS can collect a tax that has been assessed. The criminal statute of limitations is the period during which the IRS can criminally prosecute. Generally, as to tax crimes, the criminal statute of limitations is six years. (Section 6531)
The application of the statute of limitations can be very confusing and individual facts may determine how the statute of limitations is computed. Also, certain actions suspend the statute of limitations.
What Begins the Running of the Statute of Limitations?
The Filing of a tax return. The IRS assesses taxes shown on a return that is filed. The return filing date begins the statute of limitations for assessments and for the IRS to collect taxes, if the taxes are not paid at the time the return is filed.
Failure to file a tax return can result in a taxpayer incurring possible civil and criminal penalties. If a tax return is not filed, then the IRS may:
- Make a return for the taxpayer under the Code.
- Invoke deficiency procedures. The type of taxes subject to these procedures include income, estate and gift tax returns.
An Assessment by the IRS
An assessment results when the liability of a taxpayer is recorded in the office of the Secretary of the Treasury. The assessment establishes the right of the IRS to collect the tax. No lien or levy can be made without an assessment. Assessments are authorized by Internal Revenue Code.
Types of Assessments
- Summary – A summary assessment is when the amount shown on the tax return is assessed.
- Deficiency – The deficiency is the amount determined by examination under the IRC.
Statutory Notice of Deficiency (90-Day Letter)
Prior to making assessments for income, estate, and gift taxes, the IRS must send a 90-day letter stating the amount of the deficiency and setting forth the computation of deficiency.
The letter must be sent by certified or registered mail to the last known address of the taxpayer.
When are Returns Deemed to be Filed?
A tax return filed before the due date is deemed to be filed on the due date. An individual tax return filed before April 15 is deemed to be filed on April 15 and not the date that it was filed. If the tax return is filed after its due date, then it is deemed to be filed on the date it is filed.
Summary of Relevant Statute of Limitations
- Time for Making Assessment – Generally the statute of limitations for making an assessment is three years from the later of the due date of the tax return or the date it was filed. Exceptions to the three-year rule where there is no statute of limitations:
- Fraudulent return – An assessment may be made at any time if the IRS can prove a fraudulent return.
- Willful attempt to evade tax – In case of a willful attempt in any manner to defeat or evade a 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.
- No return filed – In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment.
- Substantial omission – If the taxpayer omits from gross income an amount properly inculpable therein which is more than 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within six years after the return was filed.
Extending the Statute of Limitations
Consent forms may extend the statute of limitations to a specific date or indefinitely. Several consent forms have a related termination form which revokes the extension. The following are some of the consents and termination forms used to extend the statute expiration date:
- Form 872, Consent to Extend the Time to Assess Tax.
- Form 872-A, Special Consent to Extend the Time to Assess Tax.
- Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes.
Suspension of the Statute of Limitations
Issuance of statutory notice of deficiency – The 90-day letter suspends the statute of limitations from the date of the letter up to 90 days (150 days for a foreign address) awaiting the taxpayer’s response, plus an additional 60 days. (Section 6503)
Collection of Taxes by the IRS
The IRS has 10 years to collect taxes after they are assessed.
Claims for Refund
A timely filed claim for refund or credit extends the statute date for the length of time it takes the IRS to act on the claim for refund. A claim for a refund or credit must be filed by the normal statute expiration date or within two years after the tax is paid to be considered timely.
This outline is not intended to be an exhaustive review of the statute of limitations, but to highlight some of the more common provisions dealing with the statute of limitations. There is other statute of limitations provisions that are not discussed here, and which may be relevant to the tax practitioner.