IRS Statute of Limitations sets legal time limits that both the government and taxpayers must follow. These limits specify which situations allow for extensions or pauses in payment and collection deadlines. In some cases, there are no time limits for the government to assess or collect a tax debt. Here are some of the most important time frames to consider.
What is the IRS Statute of Limitations?
- Three Years for the IRS to Assess Tax
- IRS Audit Statute of Limitations Can be Extended to Six Years
- Taxpayers Have Three Years to Collect a Refund
- 10 Years is the IRS Collection Statute of Limitations
- The IRS May Ask for an Extension
- Taxpayer Actions Can Extend the Statute of Limitations
- Statutes of Limitations are Tolled when Outside the U.S.
- There are No Limitations for Some Tax Issues
The Internal Revenue Service (IRS) is responsible for assessing and collecting the appropriate taxes from taxpayers within an allotted time frame set by law. Failing to file a tax return or pay a tax debt by due dates can result in penalties and fines that will add up quickly. The IRS calculates interest quarterly and compounds daily.
Three Years for the IRS to Assess Tax
The statute of limitations for the IRS to assess a tax debt is generally three years from the due date. However, there are some important points to keep in mind. If you file for an extension or file late, the IRS may have three years from the latest date to audit your taxes returns.
Over this three-year assessment window, an IRS tax debt can grow substantially. To collect a tax debt, the IRS has the power to levy a taxpayer’s property. This means seizing assets such as vehicles, real estate, bank accounts, and future refunds, as well as garnishing wages. The IRS can also place a federal tax lien on your properties which will impact your ability to manage them.
IRS Audit Statute of Limitations Can be Extended to Six Years
In some cases, the IRS tax codes allow for additional time to audit and assess tax debt. This could potentially give the IRS three additional years to assess your tax liability. Additional time is automatically applied in cases where a taxpayer understates income — usually by more than 25% of the total income for a tax year. You can also trigger this extension by overstating a basis or claiming an incorrect original cost.
Failing to file appropriate forms can also lead to an extension, especially if foreign income is involved. There are many possible reasons for the IRS to legally extend the assessment deadline. Depending on the results and considering the penalties and interest associated with underpayments, taxpayers could face an underpayment penalty. Keep in mind that there are options for taxpayers, especially if you cannot reasonably pay a large tax debt. The IRS has even expanded tax relief options with the IRS Fresh Start Program.
Taxpayers Have Three Years to Collect a Refund
Just as tax law limits how long the IRS can take certain actions, taxpayers also face certain time constraints. For example, a taxpayer may be eligible to pass on filing a tax return without any penalties. However, if the taxpayer is due a refund and fails to file then there is the danger of losing the refund claim. Taxpayers have three years to file a return with the purpose of obtaining a refund due. Many states mirror federal tax laws but there may be differences between states. For example, California allows up to four years for collecting a tax refund in some situations. Additionally, a deficiency assessment may impact your past state returns, which can complicate your tax situation.
10 Years is the IRS Collection Statute of Limitations
Once a tax liability is assessed, the IRS has 10 years to collect that debt. To do this, the IRS has the power to place a federal tax lien on a delinquent taxpayer’s property. The IRS can also garnish wages or seize property and assets such as your bank account. For more information, be sure to read our article, What is a Tax Levy?
The ten-year limit begins when the debt is assessed, and a bill is sent to the taxpayer. However, there are some exceptions which allow the IRS to collect after the ten-year limit. Be aware that failing to file a tax return does not start the timer on the statute of limitations. In some cases, the IRS may file a substitute return on behalf of the taxpayer in order to assess a tax debt, which will then start the ten-year timer. In situations like these, it is vital to seek professional help from a tax lawyer. Substitute income tax returns may not include all of the deductions and credits that you may be eligible to claim. A professional tax attorney can help ensure your tax return is filed correctly.
The IRS May Ask for an Extension
Don’t be surprised if the IRS asks for more time to audit your taxes. While it may seem counterintuitive to agree to an extension, there are situations where this might be your best option. Sometimes, the IRS needs more time and may ask for a signed Form 872 (Consent to Extend the Time to Assess Tax). You have the option of negotiating with the IRS over the amount of time allowed in the extension, as well as what specifically the extension covers. Failing to agree to the extension might result in an immediate deficiency assessment by the IRS and other negative results. Instead, reach out to a qualified tax professional to find out your best options.
Taxpayer Actions Can Extend the Statute of Limitations
There are actions you can take that may negatively impact your tax status. When it comes to assessing or collecting on a tax debt, the IRS follows the Internal Revenue Code, which allows extensions on time limits for a variety of reasons. Failing to file a valid tax return can prevent the clock from starting. This can include forgetting to file, falsely filing, or making a mistake on a return or required form. Tax evasion, fraud, underreporting income, or overstating basis can all lead to extensions for assessing and collecting a tax liability.
The penalties and fees also increase depending on the severity of the issues. Failing to report foreign income and failing to file the appropriate forms can result in $10,000 fines per violation. In other cases, a percentage of the understated foreign asset could be assessed as a penalty. Bankruptcy is another action that can cause the timer to stop on a tax debt. Going through the bankruptcy process may not dissolve a tax debt but instead just delay the inevitable. The penalties and interest the IRS charges may be higher than the interest rates charged by credit cards or personal loans. A taxpayer can also extend the statute of limitations by attempting to negotiate a tax debt with the IRS. This is done by filing for a Collection Due Process Hearing, an Offer in Compromise (OIC), Installment Agreement, or Innocent Spouse Relief.
Statutes of Limitations are Tolled when Outside the U.S.
Some taxpayers with debt may try to move from the U.S. and wait for the 10 years statute of limitations to expire. To prevent this, the IRS extends the statute of limitations if you leave the country, essentially stopping the clock. The statute of limitations is paused or “tolled” when a taxpayer is overseas. Fleeing a tax debt and waiting out the statute of limitations is not an option. Keep in mind that there are ways to handle and work through a tax debt. If you cannot reasonably make tax liability payments, you may be able to arrange an IRS payment plan. Reach out to Acadia Law Group today to determine what statute of limitations apply to a given tax year.
There are No Limitations for Some Cases
The 3-year tax assessment period and 10-year collection period often gives enough time to assess and collect a tax debt. The statute of limitations will not start unless a valid return is filed and a tax debt is formally assessed. A return can be deemed invalid if the necessary forms or information are missing. Living overseas can stop the clock, as can failing to file the correct forms for foreign assets.
However, for false or fraudulent income tax returns, the statute of limitations may not apply. The IRS can choose to pursue civil tax fraud or criminal fraud. There is no IRS statute of limitations for civil tax fraud, and the IRS can also pursue criminal charges if they can prove the fraud beyond a reasonable doubt. The statute of limitations on a criminal tax charge is generally less than six years. Being a fugitive will also stop the timer on the statute of limitations.
How Do I Know What Statute of Limitations Apply to My Taxes?
Taxes can be complicated. Determining which statute of limitations applies to a given tax year may be difficult, especially after many years have passed. It can be hard to remember what actions were taken or what forms were filed, leading to an incorrect understanding of the time limits.
A professional tax lawyer will know which IRS forms to file at the right time to obtain the most favorable outcome. There are also many tax debt relief options that a professional tax attorney can help you pursue. Perhaps a negotiation with the IRS might result in a decrease in the amount owed through an Offer in Compromise or other payment arrangement option.
IRS Statute of Limitations
As a debt collector, the IRS has precedence over other creditors. The IRS has three years to audit and assess penalties, which can be extended to six years in special situations, like underreporting significant income amounts. After the tax assessment, the IRS can attempt to collect a tax debt for 10 years. The countdown can stop for a variety of reasons, such as if the taxpayer attempts evasion by leaving the country. The IRS may ask for an extension, or one may be applied when the taxpayer takes certain actions like negotiating the debt or when the IRS considers an offer. There are times when no limitations apply, such as when civil tax fraud is discovered.
It can be difficult to determine which statute of limitations apply to a given year and how to calculate the associated penalties and interest. Reach out to Acadia Law Group today for assistance with your tax debt. Our tax professionals are standing by to help with unpaid taxes, refund claims, and installment agreements to help you find the tax relief you need.