Tax Controversy & Resolution: Tax Expiration / Extension
(Statue of Limitations)
Deadline for Assessments of Additional Tax (3 Years)
Generally, the statute of limitations for the IRS to make an assessment for any additional federal tax liability on a taxpayer expires three (3) years from the due date of the return or the date on which it was filed, whichever is later pursuant to IRC § 6501. A return is considered to be filed on the due date of the return if it was filed on or before its due date.
For example, if your tax return is due April 15, but you file early, the statute of limitation on assessments runs exactly three years after the due date (April 15), not the filing date. If you get an extension to October 15, your three years runs from October 15. However, if you file late and do not have an extension, the statute runs three years following your actual (late) filing date.
Under IRC § 6203, an assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.”
Treas. Reg. § 301.6203-1 provides that the assessment is made by an assessment officer signing the summary record of assessment. The summary record, through supporting documentation, is to provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. The amount of the assessment is, in the case of tax shown on a return by the taxpayer, the amount so shown, and in all other cases the amount of the assessment is the amount shown on the supporting list or record. The date of the assessment is the date the summary record is signed by an assessment officer. If the taxpayer requests a copy of the record of assessment, the taxpayer will be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.
Note, in general it is accepted that the government does not have to produce the original documentation used to make the assessment to establish that the tax has been properly assessed. See Gentry v. U.S., (CA6 1992) 69 AFTR 2d 92-1158. Instead, a certified copy of a Form 4340 (Certificate of Assessments and Payments) constitutes prima facie proof that a timely and proper assessment was made against the taxpayer. See Koff v. U.S., (CA9 1993) 72 AFTR 2d 93-5845. See also IRS 25.3.6 Open Litigation Control, Monitoring and Closing Actions.
Deadline for Substantial Omission of Items (6 Years)
IRC § 6501(e)(1) provides that the period for assessment of taxes is extended to six years when there has been an omission from gross income on a return of an amount more than 25% of the gross income stated in the return. IRC § 6501(e)(2) provides a similar rule for omissions from the reportable value of a gross estate or total gifts of items includible on a filed estate or gift tax return, and IRC § 6501(e)(3) provides a similar rule for returns of certain excise taxes. In addition, IRC § 6501(e)(1)(ii) extends the period to six years for failure to report specified foreign financial assets whose total value exceeds $5,000.
Substantial Omissions - More than 25% of Gross Income
The IRS statute of limitations is generally extended when there is a substantial omission (more than 25%) of gross income on the return. In this situation, the time limit for the IRS to make its assessment is extended out to six (6) years from the date the return is filed or deemed filed, whichever is later as provided in IRC § 6501. Per Treas. Reg. § 301.6501(e)-1, the term gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, to the extent required to be shown on the return, without reduction for the cost of those goods or services.
For example, if you earned $300,000 of gross income but only reported $200,000, you omitted more than 25% and you may be audited by the IRS for up to six years. Even if this understatement was unintentional or you reported in reliance on a good argument that the extra $100,000 was not your income, and the six-year statute will likely still apply. However, if the underpayment of taxes is not due to an omission of income, but instead overstated deductions or credits on your return, the six-year statute of limitations may not apply. Note, if the IRS argues that your $100,000 omission of income was fraudulent, the IRS may receive an unlimited number of years to audit.
Six Years for Basis Overstatements
Other items on your tax return that have the effect of more than a 25% understatement of gross income may also extend the statute of limitation for assessments an additional three years pursuant to IRC 6501(e)(2) and Treas. Reg. 301.6501(e)-1.
For example, if a taxpayer sold some property for $5M and claim its basis (investment in the property) was $2.5M, when in fact its actual basis was only $1M, the IRS may argue to extend the statute of limitation three years. The effect of your basis overstatement was that you paid tax on $2.5M of gain when you should have paid tax on $4M. Thus, the overstated basis in the property sold created a more than 25% understatement of gross income, thus the statute of limitations may be extended an additional three years.
Foreign Income, Foreign Gifts, and Assets
The three years statue of limitations period for assessments may also be extended to six years if you omitted more than $5,000 of foreign income (e.g. interest on a foreign account) as provided in IRC § 6501(e)(1). This rule may apply even if you disclosed the existence of the account on your tax return, and even if you filed a Foreign Bank Account Report (FBAR) reporting the existence of the account.
Certain other foreign related forms regarding assets, gifts or inheritances are also important to note. If you omitt one of these required foreign forms, the statute may be extended or never begin to run, until addressed. Examples include the following below.
For example, if you receive a gift or inheritance of over $100,000 from a non-U.S. person, you must file Form 3520. If you fail to file it, your statute of limitations never starts to run.
Pursuant to the Foreign Account Tax Compliance Act (FATCA), the Form 8938 is required by U.S. filers to disclose the details of foreign financial accounts and assets over certain amounts. This form is separate from FBARs and is normally filed with your tax return. The thresholds for disclosure may be as low as $50,000 depending on filing status. Higher thresholds apply to married taxpayers filing jointly and to U.S. persons residing abroad. If you are required to file Form 8938 and fail to do so, the statute of limitation for assessment and audit by the IRS may never even begin to run.
Ownership of part of a foreign corporation may also require additional reporting, including filing an IRS Form 5471. In general, the Form 5471 is not only required of U.S. shareholders in controlled foreign corporations, but also when a U.S. shareholder acquires stock resulting in 10-percent ownership in any foreign company. Failing to file it may lead to penalties, potentially $10,000 per form. A separate penalty may also apply to each Form 5471 filed late, incompletely, or inaccurately. This penalty may apply even if no tax liability is calculated on the whole tax return. Lastly, this failure to file a required Form 5471 may also leave your entire tax return open for audit assessment and/or adjustment indefinitely, until the required form(s) are filed.
Deadline for Collection of Taxes from Date of Assessment (10 Years)
The IRS statute of limitations period for collection of taxes against the taxpayer, to collect previously assessed taxes, is generally ten (10) years. Thus, once an assessment occurs, the IRS has 10 years from that date of assessment to bring legal action to collect on past tax debt, which may include levies and wage garnishments.
The 10 year statute of limitations for collection is the general collection statute. However, in certain situations, the 10 years may be renewed. The statute of limitations end date may be suspended with respect to any penalty under IRC § 6672, IRC § 6694, IRC § 6700 or IRC § 6701 for the period during which the IRS is prohibited from collecting by levy or a proceeding in court. If within 30 days of the notice and demand, the taxpayer pays the amount specified in IRC § 6672(c), IRC § 6694(c) or IRC § 6703 and files a refund claim, levy and a court proceeding is prohibited and continues until the taxpayer fails to bring a refund suit within the prescribed time period or the district court decision in the refund suit becomes final.
The statue of limitations end date may also suspended during a suit for refund of a divisible tax of employment taxes (subtitle C) and IRC § 6672 since levy action is prohibited during the suit, see IRC § 6331(i).
False, Fraudulent, or Missing Returns (No IRS Statute of Limitations)
It is also important to note that no deadline applies where the IRS can establish that a taxpayer has:
Filed a False or Fraudulent Return;
Willfully Attempted to Evade Tax; or
Failed to File a Return.
If you never file a return, fail to sign the return, or alter the “penalties of perjury” language at the bottom of the return where you sign, the IRS may also argue no time limit and the statute of limitations of three years never began to run.
When a taxpayer is willfully or intentionally not filing taxes or is filing fraudulent return(s), there may be no time limit on IRS action against such taxpayers, including increased interest fees and penalties associated.
Amended Returns & Refunds (Generally 3 Years)
Amending a Return: If a taxpayer is evaluating whether amend a tax return, the taxpayer must typically amend within three years of the original filing date. In general, amending a tax return does not restart the IRS’s three-year audit statute for assessment.
An amended return that does not report a net increase in tax does not trigger an extension of the statute. However, where your amended tax return shows an increase in tax, and when you submit the amended return within 60 days before the three-year statute runs, the IRS has only 60 days after it receives the amended return to make an assessment. See IRC § 6501(c)(7). The 60-day period may not apply to amended employment taxes, excise taxes, gift or estate taxes. See IRM 25.6.1 Statute of Limitations Processes and Procedures.
As such, this narrow window can present planning opportunities regarding timing when considering amending opportunities.
Claiming a Refund: Claim for refund must generally be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Moreover, no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in IRC § 6511(a) for the filing of a claim for refund, unless a claim for credit or refund is filed within such period.
Refund Claim Made Within the 3 year Period
Amount of the refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.
Refund Claim Made Outside the 3 Year Period
Amount of the refund shall not exceed the portion of the tax paid during the 2 years immediately preceding the filing of the claim.
Extension of Time by Agreement (time for filing claim)
Period for filing claim for refund shall not expire prior to 6 months after the expiration of the period within which an assessment may be made pursuant to the agreement or any extension thereof under IRC 6501(c)(4)
Special Period of Limitation with Respect to Net Operating Loss or Capital Loss Carrybacks.
Period for filing a claim shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions) for the taxable year of the net operating loss or net capital loss which results in such carryback, or the period prescribed in IRC § 6511(c) for extension of the period of assessment in respect of such taxable year, which ever expires later.
Special Period of Limitation with Respect to Certain Credit Carrybacks
Period for filing a claim shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions) for the taxable year of the unused credit which results in the carryback (or, with respect to any portion of a credit carryback from a taxable year attributable to a net operating loss carryback, capital loss carryback, or other credit carryback from a subsequent taxable year, the period shall be that period which ends 3 years after the time prescribed by law for filing the return, including extensions thereof, for such subsequent taxable year) or the period prescribed in § 6511(c) for extension of the period of assessment in respect of such taxable year, which ever expires later.
See IRC § 6511; IRS Publication RC Refund Claims Limitation Periods (Published 5/2008).
As outlined above, for example, if you made tax payments (by withholding or estimated tax payments), but you have not filed tax returns for five years, when you file those past-due returns, the over-payments in one prior tax year may not offset underpayments in another.
Other Statue Extending Considerations
Extending the Statute of Limitations (Assessments) per IRS Request
The IRS typically must generally examine a tax return within three years, unless one of the many exceptions to extend the statute applies. When the statue of limitation is nearing running to prevent an IRS audit, often the IRS may contact you about two-and-a-half years after you file, asking you to sign a form to extend the statute of limitations beyond the three years under statute. Some taxpayers will quickly deny this request to extend beyond three years. However, doing so may prompt the IRS to quickly react and send a notice assessing additional taxes, without thoroughly reviewing your explanation of why you do not owe additional taxes, and may create more issues and time on your part to defend. To avoid the IRS making unfavorable assumptions, it may be advantageous to agree to the requested extension depending on the situation.
As an alternative to the IRS request to extend the statute, you may instead agree to limit the scope of the extension to specific tax issues, or to limit the time (e.g. additional 12 months).
IRC § 6501(c) allows the IRS and a taxpayer to consent in writing to extend the statute of limitation to assess tax. The statute may be extended on all types of taxes except estate tax (IRC § 6501(c)(4)).
When presented with an extension request for an income tax case, the taxpayer may consider requesting a fixed statute date as opposed to an unspecified date ("open-ended"). An open-ended statute of limitation may result in an examination being in process for a longer duration than expected because there may be no urgency from the IRS to complete the audit. It may also subject a taxpayer to an unexpected assessment if the Form 872-T (Notice of Termination of Special Consent to Extend the Time to Assess Tax) is not submitted. Form 872–T is a written notification that terminates the open-ended consent 90 days after issuance by the Service or 90 days after the date on which the Form 872–T is received by the IRS office designated by the Commissioner of Internal Revenue.
A taxpayer can also generally extend an initial fixed extension date by signing a second consent. The taxpayer may even request a shorter extension period than requested by the IRS to help resolve examination more quickly.
The taxpayer can also request a consent that is restricted to specific issues. The procedures for restricted consents are found in Rev. Proc. 68-31, as modified by Rev. Proc. 77-6. See IRM 25.6.22 Extension of Assessment Statute of Limitations By Consent. However, the IRS often does not prefer restricted consents as they generally must be approved by authorized IRS personnel and may require additional procedures that could delay resolution. Consents agreements generally are presented after examination and reports have been completed. Restricted consents are also usually limited to two issues.
Other Statute Traps
IRS notice is sent to a partnership, but not to its individual partners. The audit or tax dispute may be ongoing, but you may have no personal notice of it. You might think that your statute has run and that you are in the clear. However, the partnership tax rules may give the IRS additional time.
Statute may be “tolled” by an IRS "Jane Doe" Summons (although you have no notice of it). A "Jane Doe" summons is issued not to taxpayers, but to banks and other third parties with financial relationships with taxpayers. For example, suppose an outside consultant has sold you on a particular business strategy. The IRS may issue the outside consultant a summons, asking for all the names of their clients. While the outside consultant argues against providing their client list, the statute of limitations clock for all of those clients (which may include you) may be stopped.
IRS statute is tolled where taxpayer is outside the United States. If you leave the country for years and return, regardless of having no knowledge that the IRS has a claim against you, your statute of limitations may be extended.
State Tax Statutes. Many states have the similar 3 or 6 year statute of limitation tax laws as the IRS. However, each state will often have different rules governing their own time periods for the statute to run, giving each jurisdiction potentially more time to assess additional taxes. For example, in California the general tax statute of limitations is four years (not three) for assessment. However, if the IRS adjusts your federal return, you are often required to file an amended return in California to reconcile applicable adjusts from the IRS. If you do not, the California statute of limitations may never begin to run or expire. Also, as in most state jurisdictions, if you fail to file a proper California return, the California’s statute may never starts to run.
Maintaining Adequate Records. The statute of limitations is often dictated on your retained records. Proving exactly when you filed your return, or confirming which forms and/or figures were included in your return, can be critical during exam. As such, keeping detailed records, such as proof of certified mailings of your returns can be critical. Because a large majority of IRS disputes are settled outside of court, having accurate records and support can be critical for reaching more beneficial settlement terms.