Understanding the IRS Statute of Limitations

You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”. With a statute of limitations, you can now have a definite answer.

In a nutshell, this means that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed. Unfortunately, the statute of limitations is largely dependent on whether you have indeed filed the return and whether you have included fraudulent information on it.

To help you better understand the details of the IRS Statute of Limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.

 

What Is A Statute of Limitations?

In tax law, a statute of limitations is one of the most critical deadlines for the assessment of tax. It gives the IRS an X-year window to assess your tax files and attempt to collect your unpaid taxes. Just how many years back can the IRS go to assess these files depends on several factors. The truth is, though, that once the given time period is up, the IRS is obliged to stop its collection efforts.

Nevertheless, there are several exceptions to the general rule (see below for details) according to varying federal laws. This means that, under certain circumstances, like, for example, failure to file a tax return, the assessing period is extended. In some cases, it never starts to run and remains “open” perpetually.

It is, therefore, crucial that you familiarize yourself with the current exceptions, so you know what to expect and what your rights and obligations as a taxpayer, in each case, are.

 

How Long Is the IRS Statute of Limitations?

The general rule dictates that the IRS has the right to go through your tax files up to 10 years from the time of debt assessment which is the date your tax return is processed (not filed or received). In other words, the IRS can legally try to collect unpaid tax debt for up to 10 years from when your tax return was assessed. After the end of this ten-year period, the IRS must cease its collection attempts.

Now, here comes the confusion. The IRC (Internal Revenue Code) that governs federal tax laws in the USA was also published under the U.S. Code Title 26. So, don’t be surprised if you often see IRC statutes being referred to as statutes of limitations (i.e., the IRC § 6501 and 26 U.S. Code § 6501 share, more or less, the same details).

Irrespective of the format, the regulations established by both sets of code affect millions of taxpayers, including recording the taxpayer’s tax liability, the deadline for assessing tax, and other statutes of limitations.

26 U.S. Code § 6501(a), in particular, mentions that the IRS shall assess a taxpayer that owes taxes within three years after the filing of the return, regardless of when the return was filed (on or after the prescribed date). The exceptions referenced in this code are set forth under 26 U.S. Code § 6501(c), and give the Internal Revenue Service extra time to assess taxes in the following cases:

  • Up to 6 years – If there has been a significant omission of items, like, for example, an omission of a sum over $5,000. Also, if a taxpayer does not share specific details regarding their personal holding company return.
  • Unlimited amount of time – In case of tax evasion (a willful or deliberate attempt on behalf of the taxpayer to evade taxes). Acting with a lack of due care and negligence are two cases when this time extension does not apply. The rule also applies when the taxpayer files inaccurate or false tax returns (intentionally to evade taxes) or when they fail to file a tax return.

It becomes apparent that the federal law gives the IRS all the time they need to assess tax (even decades) when a taxpayer engages in fraudulent or intentional acts (i.e., reporting untruthful information on their income tax return). For that reason, it is crucial that you understand that, say, lying to an IRS civil auditor or even worse, an IRS Criminal Investigation agent about the prior tax fraud or tax evasion (in cases where tax evasion or fraud is suspected) gives the IRS and IRS Criminal Investigation Division unlimited time to prosecute you, especially when the last affirmative act of tax evasion took place in the 5- 6-year criminal statute.

Important Note: Depending on the specific criminal tax statute, the IRS can criminally prosecute income tax evasion in the following 5-6 years after the tax evasion attempt has occurred. This is a major consideration as the IRS won’t be simply civilly assessing additional tax that has no statute of limitations after tax fraud has been identified.

 

When Does the IRS Statute of Limitations Begin and End?

The clock of the statute of limitations begins to tick on the date your tax return is assessed (NOT when it’s sent or received) or of your account’s last activity, which is usually the date you last used your account or the date you last made a payment. Nevertheless, it may also include the date you entered a payment agreement, made a promise to pay, or acknowledged debt liability.

However, take note that you may hear from a debt collector even after the expiration of the statute of limitations. According to law, they can file a lawsuit against you at any given time. In case you are being sued for old tax debt, your tax attorney can try to avoid a judgment being entered against you by using the expired statute of limitations as your defense mechanism.

So, if you have an old debt, knowing whether the statute of limitations has expired or not will help you decide whether to leave that old debt alone or pay it off. This involves being aware of when your tax debt was assessed/processed (NOT when you sent your tax return or when it was received) – you will need to have your tax transcripts pulled to know these details.

 

Tolling Events — Events That Pause the Clock on the Statute of Limitations

Under certain circumstances, the statute of limitations can be tolled. This means that the running of the time period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.

However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t actually shorten it.

Examples of tolling events are:

Filing for Bankruptcy

According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.

Requesting an Offer in Compromise

This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.

Lack of Legal Capacity

It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.

Unconditional Promise to Pay

Either a debt acknowledgment or an unconditional promise to pay the due debt may toll the statute of limitations for obligation or debt. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the debt. The period of limitations will begin again upon that due date.

Cause of Action Has Been Concealed (Fraudulently)

In this case, the statute is suspended until the action is discovered via the exercise of due diligence.

Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.

 

How to Use the Statute of Limitations To Your Advantage

Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.

Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000. But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax debt is now $70k–more than you even made that year!

So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax debt reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.

The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.

You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.

Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax debt and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

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