Statute of Liberty: The Statute of Limitations, the IRS, and You

The Statue of Liberty

If you’re a fan of legal dramas and police procedurals – and who isn’t? – then you may have heard of the term “statute of limitations.”  In the broadest sense, a statute of limitations is a law that sets the maximum amount of time after an event within which legal proceedings may be initiated.  Did you know there are statutes of limitations on the IRS?  Familiarizing yourself with these limitations can help you protect yourself from IRS overreach.

Statute of Limitations on Collections

Under most circumstances, the IRS has 10 years to collect any tax debt owed.  This means they have up to 10 years to attempt to collect unpaid taxes from the date they were assessed.  The actual window for collections, though, can actually extend beyond 10 years in some circumstances.  During any period that the IRS is barred from attempting to collect – for example, if you declare bankruptcy and the judge issues a stay preventing the IRS from taking action – the statute is extended for that period plus six months.  The 10 years can also be extended by seeking an installment agreement, offer in compromise, or innocent spouse relief – the IRS suspends collection attempts during these processes, and “stops the clock” on the statute of limitations until collection attempts may legally resume.  There is also a voluntary extension, whereby the taxpayer agrees to extend the statute of limitations.  This is usually agreed to when an installment agreement for an amount lower than owed is offered to the tax payer.  The taxpayer agrees to the installment agreement, and the IRS extends the statute of limitations another six years.  If you find yourself nearing the end of the 10-year period, don’t be surprised if the IRS offers an installment agreement with attractive terms, with the primary intent to extend their time to collect!

Statute of Limitations on Assessments

The standard statute of limitations for the IRS to assess taxes on a taxpayer expires three years after the due date of the return, or the date on which it was filed, whichever is later.  A return filed prior to the due date is considered filed on the due date.  The statute of limitations increases to six years when the income on the return is “substantially” understated (understated by 25% or more).  This statute of limitations also limits how long the IRS may take to make an assessment during an audit.  Regardless of when the return was selected for audit, the IRS only has three years from the date filed to create an assessment of taxes owed.  The IRS may ask the taxpayer to voluntarily extend the statute.An extension may allow the taxpayer more time to produce documentation and prevent the IRS from simply assessing whatever amount they currently deem appropriate.

Statute of Limitations on False, Fraudulent, or Missing Returns

If the return in question included false or fraudulent information, willfully attempted to evade tax, or was never filed to begin with, there is no statute of limitations.  Additionally, the government may prosecute offenders in this category, with jail time a real possibility.  This also means that not filing your return and hoping to hide for 10 years is not a winning strategy – the statute of limitations does not start until your return is filed, so the clock never starts ticking.

Statute of Limitations for Examination

The IRS generally has three years to select a return for audit.  If they find “substantial” errors during the audit, they may add additional years to the process.  Generally, the IRS will not go back further than six years.

Statute of Limitations on Refunds

What’s good for the goose is good for the gander – the IRS has limitations on how long it may take to seek payment, and the taxpayers are limited in the time they may take to seek a refund.  Refund claims must be made within three years from the due date of the return, or within two years from the date the payment was made, whichever is later.  This means that if you discover that you overpaid your tax in a prior year, you only have three years from the original due date of the return to file an amended return seeking the refund.

Although it is rare for the IRS to miss these deadlines, it does happen, and it’s good to know these deadlines if you ever face one of the above situations.  Don’t count on the statute of limitations to bail you out of a bad situation– the closer the IRS gets to the statute of limitations, the more aggressive their efforts to collect will become.  The IRS can use liens, levies, wage garnishment, and more in an attempt to collect, so the best strategy is to pay what you owe as soon as you can and/or consult a tax professional, such as a CPA, EA (Enrolled Agent), or a tax attorney.