S is for Statute of Limitations.
All good things must come to an end… And even the Internal Revenue Service has a limit on how much time can pass before they may no longer assess and collect on federal income taxes. In the legal world, these time limits are called the statute of limitations (SOL).
An SOL isn’t a simple line in the sand. The SOL depends on a number of factors. Here’s a quick look:
- For purposes of claiming a refund, the SOL expires three (3) years from the due date of the return even if you file the return before the due date. So, for example, if you file your 2012 return on February 1, 2013, but your return is due on April 15, 2013, the SOL will expire after April 15, 2016. Filing an extension may extend the period for claiming refunds (IRC section 6511(b)(2)(A)).
- For IRS purposes, the SOL to examine your tax return, make changes or to assess any additional tax liabilities is three years from the due date of the return or the day you actually filed your tax return, whichever is later. So, using the same example as before, the SOL for changes to the return would expire after April 15, 2016. However, if you file your return after the due date, the later date applies: if you file for the 2012 tax year on October 23, 2013, the IRS may examine your tax return, make changes or assess additional tax through October 23, 2016.
- The rules change if you aren’t exactly forthcoming with the IRS. Under section 6501, if you substantially understate your gross income (generally, by more than 25%), the SOL is extended to six (6) years. If you file a false or fraudulent return or are willfully attempting to evade tax, the statute doesn’t run at all. In these cases, the tax may be assessed or collected at any time.
- Additionally, if you fail to file a return, the statute never runs. In other words, there is no SOL and taxes can be assessed at any time.
Got it so far?
The rules change when it comes to collections. With respect to collecting tax, the IRS generally has ten (10) years after the date of the tax liability has been assessed to collect. If the tax liability was determined by the amount reported on your return, then the collections period starts as of the date of filing. If the tax liability is the result of a substitute return filed by the IRS (because, for example, you didn’t file), an examination or a change to your return, the SOL begins to run as of the date the assessment is made final.
For purposes of collections, the IRS has ten (10) years to collect the tax. If the IRS doesn’t collect the tax within that ten (10) years, the SOL expires and the IRS can’t make additional efforts to collect the tax due.
Exceptions and special circumstances can result in changes to the SOL. For example, if you’ve been outside of the U.S. for a significant period of time, submitted an Offer in Compromise, or agreed to an extension with IRS, your SOL deadlines may be different. Details can be found in the Tax Code (IRC section 6501 and following). As always, if you have questions, you should consult with your tax professional.