Tax Statute of LimitationsWhat is the Statute of Limitations for Taxes?

In legal terns, the statute of limitations is the maximum time after an event in which a proceeding may be initiated.  The Internal Revenue Code requires that the IRS will assess, refund, credit, and collect taxes within specific time limits.  The tax code is filled with various statute of limitations, many of which protect the taxpayer and some that seemingly favor the government.  It is key to understand the types of statutes of limitations as they impact your rights responsibilities and as a taxpayer.

Refund Claims

This very unfavorable statute limits the time a taxpayer can claim a refund from the IRS.  Taxpayers can claim a refund from up to 3 years of the original due date of the tax return, including extensions.  So, your unfiled 2017 tax return (originally due 04/15/18) can be filed claiming a refund up until year 2021, as late as October 15th if you requested an Extension.  When helping a taxpayer with unfiled back taxes, I am amazed how many of these returns are actually refund claims and sometimes are saddened to report that their refund is not going to be issued because it is out of statute.

The same rule applies for amended tax returns claiming refunds on Form 1040X.  If you filed your tax return before the due date, it is deemed filed on the due date.  For example, if you filed your 2017 tax return on March 1st 2018, you would have until April 15th 2021 to claim your refund.  Now let’s say you filed your 2017 tax return over a year late on June 1 2019 and paid a balance due.  In this case you would actually have until June 1, 2021 to file an amended tax return as the law states you also have 2 years from the date the tax was paid if later than the original due date.

Tax Refund Statute of LimitationAudit Assessments

This time statute strongly favors the taxpayer, in that it limits the time the government can assess additional tax against you after you have filed your tax return.  Generally, the IRS has 3 years from the date you filed your tax return to audit your return and ultimately assess additional tax, interest and penalty against you.  So, if you filed your 2017 timely in April 2018, the IRS has only April 2021 to do this.  However, if you are being audited, the IRS may ask you to extend the statute of limitations to complete their process.

If you do not file your tax return at all, there is no statue of limitations, meaning the IRS can always assess tax at any time in a process called a substitute for return (SFR).  The IRS will assess tax based on information provided by third parties without any regard for deductions.  For example, if you received a ten thousand fee, the IRS can assess tax without any business write-offs dramatically overstating your tax liability.  The assessment can generally be corrected by filing your delinquent tax return.

Collections Statutes

This statute favors the taxpayer in that the IRS has 10 years to actually enforce collection of the debt against you once the tax is assessed.  Assessment of the tax will generally require your filing the tax return.  After the collection expiration statute expires, debt collection should go dormant, however don’t expect the IRS to notify you.  Now a decade of worries from the IRS is long time to consider, but as time goes by this rule provides the leverage needed to settle your tax debt for less.  Let’s say the IRS only has a few years left on the collection expiration statute, the IRS will likely be more willing to make a deal to get something out of you rather than risk getting nothing.  There are some events that may toll the statute, that you should be aware of.  For example, if you file an appeal against an IRS decision, that period is not included.