Without a doubt, there are more misconceptions about the statute of limitations concerning tax matters than any other area of law that I practice. It comes up in consultations, over the phone, at a party, etc. and the conversation usually starts out with the line, “A buddy told me…is that true?”
I am not sure who this buddy is, but he/she is always unreliable. The first problem is that most people do not know (and I do not expect them to) that there are at least two statute of limitations questions to consider. The first concerns the statute of limitations on assessment. The second concerns the statute of limitations on collection. There is even a separate statute of limitations on claims for refund. Each must be addressed separately.
For the average taxpayer, there are two major things to remember about the statute of limitations on assessment:
• There is no statute of limitations on assessment for unfiled returns.
• Generally, the IRS has three years to challenge the accuracy of a timely filed return through examination or audit. For example, for 2012 returns timely filed on April 15, 2013, the IRS has until April 15, 2016 to audit or exam the return.
Yes, you read point number one above correctly. If you do not file a return, the IRS can assess a deficiency at any point. It could be now, 15 years from now, or never. The lesson – file your returns when due.
Regarding point number two above, I say generally because there are exceptions to the three-year limit on additional assessments for, among others, fraud and gross understatements of income.
There are also two major things to remember about the statute of limitation on collection:
• The statute of limitations on collection is ten years.
• The IRS can extend a tax liability beyond the initial ten years by reducing the liability to a judgment lien. If that happens, the IRS can conceivably renew that judgment lien once every ten years as many times as they want.
While the IRS does not typically reduce tax liabilities to judgment liens in the courts, the important thing to know is that they can and will if they deem the liability important enough, big enough, or a possibility of collection remains.
Finally, taxpayers should be aware that there is a separate statute of limitations on claims for refund . The general rule is that taxpayers have three years from the date an original return is due to file a return and claim a refund. There are many variations on this rule which are beyond the scope of this blog posting, but I will provide an example for the typical taxpayer.
Ignoring extensions and other delays, let us assume that the 2012 tax return is due April 15, 2013. Taxpayer X, whose return shows a refund of $500, decides not to file for some undetermined reason. If Taxpayer X later decides he/she later wants to claim their refund by filing the 2012 return late, the last possible day to do so is April 15, 2016. Please note, if Taxpayer X decides to wait until the last possible day, the envelope containing the return better be postmarked April 15, 2016 in order to fall under the protection of the Timely Mailed, Timely Filed Rule.
The point of this is article is to illustrate that there are different types of statute of limitations when it comes to tax matters and there are variations on each type. Advice from a buddy may be what you want to hear, but if and when he/she is wrong, just remember it is you who is left holding the bag.
If you have any statute of limitations questions, feel free to give me a call at (314) 261-4111. I am more than happy to help.
Until next time,