IRS Statute of Limitations

Do you have a federal tax debt? Interested in the IRS policy on statute of limitations?

Statute of Limitations on Taxes

Owing money to the IRS can be overwhelming. When you file your tax return and a balance results, knowing your options on how to best address it is very important. The first thing to know about owing a balance to the IRS is that it has a shelf life, otherwise known as an IRS statute of limitations. A statute of limitations defines the maximum time that an entity has in order to initiate a legal proceeding. Once the statute of limitation ends, those legal proceedings can no longer be pursued. This means that the IRS won’t be on your back about a debt for the rest of your life—their collection power is bound by a statute of limitations. While this might seem like good news for anyone who owes the government agency an outstanding balance, the length of time that the IRS can collect on your debt is not always as clear cut as it seems.

An IRS Statute of Limitation is a time period established by law to review, analyze and resolve taxpayer and/or IRS tax related issues. Once that time period passes, the IRS can no longer assess additional tax, allow a claim for refund by the taxpayer, or take collective action.

In the case that you’re in poor standing with the IRS, you may receive an IRS notice CP501 as a reminder of balance due. It’s important to understand how long the collectible window lasts for your individual circumstances, and it’s essential that taxpayers understand how their actions could extend the period during which the IRS can pursue them for a tax debt.

When Does the Statute of Limitations Start?

There are two vital limitation periods to understand: assessment issues and actual collection. The IRS can examine your tax returns, assess additional taxes, make changes to your filing, or file a suit against you within the first three years following the due date of your return, or the day you actually filed—starting from whichever was later. If you file an amended return, the statute of limitations is not extended; the original date remains in place. If you understate your income on a tax return by more than 25 percent, the statute of limitations is automatically extended to six years. If you filed a false or fraudulent return, never filed a return, or you willfully attempted to evade paying your taxes, there is no statute of limitations.

3 Year Statute of Limitations: Tax Audit

In order to audit your tax return, the IRS generally has three years from federal tax day, April 15th. In the case that you file your taxes early, the statute of limitations still gives the IRS the same amount of time.They still has 3 full years from April 15th to audit those taxes. In the case that you received an extension on your taxes, the IRS has 3 full years from the due date of your extension. So if you received a 6 month extension on your taxes and your extended tax date is October 15th of 2017, the IRS has until October 15th of 2020 to audit your taxes. Again, even if you file earlier than your extension due date, the IRS has 3 full years from the extended due date to audit your taxes. In the case that you missed federal tax day and you didn’t file for an extension, the IRS has 3 full years from the date that you file. So if you filed on May 30th of 2017, the IRS has until May 30th of 2020 to audit your tax return.

6 Year Statute of Limitations: Underreporting

When it comes to intentional deceit, the IRS is not a terribly forgiving organization.The 3 year statute of limitations is a general guideline, but if the IRS discovers that you’ve withheld information from them, it can quickly be extended. In the case that you have intentionally deceived the IRS, they have an additional 3 years on their statute of limitations. That gives them 6 years to audit you.

What exactly qualifies as intentional deceit? Let’s review those circumstances:

  • In the case that a taxpayer omits 25% or more of their income, the IRS will extend their statute of limitations to 6 years.
  • In the case that a taxpayer fails to disclose foreign financial assets for which related income is more than $5,000, the IRS will again extend their statute of limitations on an audit to 6 years.
  • In the case that a taxpayer files a fraudulent tax return, the statute of limitations on an IRS audit may be extended indefinitely.

If you haven’t figured it out already, it’s never a good idea to lie to the IRS, and the worse your lie, the more time they have to pursue your case.

10 Year Statute of Limitations: Tax Debt & Back Taxes

Generally speaking, the IRS has 10 years to collect on a tax debt balance. This 10-year clock starts ticking on the date your tax return is processed, which could mean the date you filed your taxes, or the date the results of an IRS tax audit are finalized. For example, if your 2014 tax return was processed on 04/15/2015, the IRS has until 04/15/2025 to collect on any balances that result. If you didn’t file a tax return, and the IRS created a substitute return in the case of a deficiency assessment, this return marks the beginning of the limitations period.

If you’ve been sitting on overdue taxes, and you haven’t filed a return or received a bill from the IRS, the clock has not started ticking on that 10-year period. This means the IRS has unlimited amounts of time to pursue you for tax debt. It’s important to file your tax return as soon as possible in order to start the clock on that decade. In order to do so, you’ll need to have an assessment, as you’ll be required to show proof to the IRS that the date of this assessment was when the 10-year period began. This can have lasting effects on your resolution options, so be sure to get in contact with the IRS immediately.

The IRS doesn’t consider a taxpayer’s debt in one collective amount; the government agency takes each assessment made as an individual event. Any given taxpayer may have several assessments. If you need back taxes help for numerous years, you’ll have to determine each year’s tax liability, then determine the penalties and interest related to each tax debt. When it comes to the IRS statute of limitations, the clock starts running for each of these different assessments only on the date they’re finalized by the IRS. This means a taxpayer may have numerous expiration dates to worry about; these expiration dates are known as Collection Statute Expiration Dates (CSED).

Taxpayers can have problems with the IRS statute of limitations because they are subject to change and can be extended. Common scenarios for extending IRS statute of limitations involve: filing bankruptcy, filing a claim for an innocent spouse, submitting an offer and compromise that is ultimately rejected, examinations of the filed return, etc.

There are circumstances in which the IRS statute of limitations can be paused, meaning the clock stops running. Many taxpayers find that the 10-year collection period lasts much longer than 10 years, because it can be suspended at different times for various reasons. Any pause automatically extends the amount of time the government agency can collect on your debt.

A CSED Extension:

This doesn’t happen often, but the IRS and a taxpayer may agree to extend the collection period themselves. This means you voluntarily agree to give the government more time to collect from you. This generally only occurs when a taxpayer is hoping to negotiate a smaller installment agreement, but the IRS has been seeking this consent less and less in recent years.

Filing for a Collection Due Process Hearing:

When you owe the IRS, you’ll being receiving a series of collection notices that get more severe with each notice. If you’ve received a Final Notice of Intent to Levy, or worse, you’ve received a Notice of Federal Tax Lien, you’ll need to respond as soon as possible to stop wage garnishment and property seizure. These notices will inform you that you have a right to a hearing, which is known as a Collection Due Process (CDP) hearing. You’ll generally receive hearing application forms with these notices, and as long as you fill them out and send them in a timely manner to the IRS, you’ll be entitled to a hearing. While the process is pending, the IRS cannot take enforced collection action against you. Unfortunately, it’s common for the hearing process to take up to two years—because the IRS can’t collect during this time, the CSED is tolled. There’s one case in which the expiration date isn’t extend; filing for an Equivalency Hearing allows the IRS to continue collecting on your debt, which means the original expiration date remains in place.

Filing Bankruptcy:

Many believe that bankruptcy is the best option for relieving tax debt, but declaring bankruptcy can actually affect the timeline of the statute of limitations on your tax debt. If you file for a personal bankruptcy, the statue of limitations is paused for however long the bankruptcy is left open. The actual amount of time can vary based on the type of bankruptcy declared. Chapter 13 bankruptcies may see the IRS statute of limitations tolled for years, while Chapter 7 bankruptcies tend to last between six to nine months. Very often, the statue may be extended for some time after the bankruptcy has been closed.

Offer in Compromise:

Taxpayers who will never realistically be able to pay off their tax debt in full may consider requesting an offer in compromise. While rare, if approved, your tax debt will be settled for a lesser amount—one that you can realistically pay off within a reasonable amount of time. While your offer in compromise is being considered, the CSED is tolled. Take time to seriously consider whether an offer in compromise is the right choice for you. Unless you can give a reasonable offer, the IRS will easily shirk your filing. Even if your offer is within the realm of reason, the IRS doesn’t need to accept it. Many find that the IRS tells you to file an offer, if simply to extend the CSED, which gives them more time to collect on your tax debt.

Requesting an Installment Agreement:

Installment agreements are requested when a taxpayer cannot pay their tax debt in full currently, but will be able to pay it off over time. If your request is approved, it will allow you to make monthly payments to the IRS over a set period of time until your tax liability is paid off in full. While this can be a wonderful option for those facing insurmountable debt, it’s important to keep in mind that while your request is being considered, the CSED is tolled, extending your 10-year period.

Innocent Spouse Relief:

If you file a joint tax return with your spouse, but want to avoid tax liability, you may file for innocent spouse relief. After requesting this reprieve from a tax debt, the CSED on that tax liability may be tolled, extending the expiration date.

Living Overseas:

Don’t think that leaving the United States means leaving your debt behind. When you go overseas, the time pauses on your debt. The government agency’s arms get longer all the time, and the IRS has ways of collecting what they’re owed. If you have debts outside of your tax outstanding balance, your creditors may write off your balance. Should your creditor file a 109-C form with the IRS to report unpaid amounts, your debt will be qualified as income. The IRS will then expect you to pay taxes on that phantom income. The IRS has ways of identifying those who leave and enter the country with unpaid tax assessments. The Department of Homeland Security controls the Treasury Enforcement Communication System database. This database is able to identify individuals with outstanding tax balances that travel into the United States. If you’re flagged in the system, the Immigration and Customs Enforcement agency can detain you, and mark your name for a follow up from an IRS agent.

What if I have an Unpaid Refund?

If you’re on the opposite end of the spectrum and looking to claim money owed to you from the IRS through an unpaid refund, you only have three years to do so. The IRS is willing to fine, but less willing to refund. While the IRS Statute of Limitations limits the IRS from assessing additional tax on any filed returns, it simultaneously limits the window of time during which taxpayers can claim a credit or refund. There’s a key difference to understand; while the IRS has 10 years from the day the return is filed, the taxpayer is only given three years from the day the return is actually due.

Form 872

There are different lengths for a statute under specific circumstances. If that tax year is audited, the taxpayer may be asked to file a Form 872 that extends the statute of limitations so that there can be more time for the IRS to assess and complete the audit.

In a recent court case, an auditor received a Form 872 from a taxpayer that was incorrectly filled in with the wrong tax year. A notice of proposed assessment was issued by the IRS, but was done beyond the original three year statute but prior to the expiration date listed on the Form 872. That taxpayer tried to claim that the proposed assessment was barred by the statute of limitations since the form did not have the correct subject tax year.

The court ruled in favor of the government, but it did indicate that the taxpayer, as well as the IRS, made the mistake in that they both thought that that Form 872 applied to that tax year under audit. The Tax Court reformed the Form 872 to apply to the correct year that the IRS was intending to audit.

The Tax Court hypothesized that a different result could have occurred if the taxpayer noticed the IRS’ mistake on the Form 872 and but signed it anyway, and could somehow prove that was the case.

Statute of Limitations on Foreign Assets

In 2010, the government extended the IRS Statute of Limitations of foreign financial assets equaling more than $5,000 from 3 years to 6 years. This law is disclosed and filed under the Foreign Account Tax Compliance Act, also known as FACTA.

First, an IRS Statute of Limitation is a time period established by law to review, analyze and resolve taxpayer and/or IRS tax related issues. Once that time period passes, the IRS can no longer assess additional tax, allow a claim for refund by the taxpayer, or take collective action.

What does this mean for someone who filed their taxes for their foreign financial assets prior to 2010? Here are some examples of how it could affect certain taxpayers:

  1. If someone had more than $5,000 of foreign financial assets filed for their 2006 federal income tax on April 15, 2007: since the previous statute did not expire before FACTA took place, that person would have still been eligible for an audit on April 15, 2013.
  2. If someone filed for their 2008 taxes on April 15, 2009 and did not include the more than $5,000 of foreign assets they had during that year, they would still be eligible for an audit until April 15, 2015, despite filing their taxes under the previous IRS Statute of limitations.
  3. If someone filed their 2005 form 1040 by April 15, 2006 but failed to include more than 25 percent of their income (and having more than $5,000 attributable to a foreign financial asset), since the statute is 6 years from filing for both of those issues, that statute would not have expired until 2012.

How Can Community Tax Help Me?

At Community Tax, the first thing that our tax practitioners do is contact the IRS to get a sense of the balances owed on a taxpayer’s account. We work to determine the statute of limitations associated with each balance that has been assessed. Our practitioners are able to determine a specific collection expiration date on each balance owed, determining just how much time the IRS has left to collect your unpaid tax debt and helping you come up with plans to pay off what you owe and avoid further consequence.

What many taxpayers do not realize is that the collection expiration dates can play a significant role in determining how to address a tax balance. For example, if a client has multiple balances that are owed to the IRS, is not missing any tax returns, and they are scheduled to expire in 3 months, we would not pursue an offer and compromise (OIC). Submitting an OIC extends collection expiration dates and if a taxpayer has 3 months before balances expire, pursuing a currently not collectible (CNC) status is a much better strategy. Provided a client qualifies for CNC, the client will avoid collection action for 3 months and the balances will expire. The tax practitioners at Community Tax take this approach when assessing every case, regardless of whether a taxpayer qualifies for a payment plan or hardship resolution. No matter your circumstances, our team of tax professionals will work diligently to give you the best deal.

So, there is significant value in hiring a company like Community Tax when you have multiple, outstanding tax balances with the IRS. Our tax practitioners are able to evaluate your account at the beginning of the relationship and develop a personalized, strategic plan for how to address your balances, taking your IRS Statute of Limitations into consideration. Doing so, has the potential of saving a taxpayer thousands of dollars, depending on their situation. Call Community Tax today for more information about how we can help you at 1-888-676-4128.

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