How Does the Statue of Limitations Affect Tax Obligations With the IRS?
The statute of limitations limits the time during which an action can be brought by the IRS for an audit and the time for IRS tax collection activities. Generally, there is a 3-year period for the IRS to give you a refund, three years to audit your tax return, and ten years to collect any tax due.
The 3 year rule for refunds
You have 3 years to file a tax return to receive a refund. This timeline is measured from the original deadline of the tax return, plus three years. For example, your 2010 tax return is due on April 18, 2011. Add three years to this filing deadline, and you have until April 15, 2014, to file your 2010 tax return and still get a tax refund. If you file your 2010 return after April 15, 2014, then your refund "expires." That refund money cannot be sent to you as a check, it cannot be applied as a payment towards another tax year, and it cannot be used as an estimated payment. It goes away forever because the statute of limitations for claiming a refund has closed. If you have already filed a tax return, you have three years from the date you filed your return to claim any additional refunds by sending in corrections with an amended return.
The IRS has 3 years to audit your tax return or to assess any additional tax liabilities
The flipside to the 3 year refund rule is that IRS only has 3 years to examine a filed return by audit in most cases. There are exceptions to these rules. There is no statue of limitations for instances where a return was not filed or if you have committed fraud or tax evasion. There is also a 6 year rule for audit in cases of "substantial omission" of 25% or more in income. But for most people, the three year statute will apply on audits.
We could utilize the same example as in the refund situation: the IRS has until April 15, 2014, to audit a 2010 tax return filed on or before April 18, 2011. After the three-year audit time period has expired, the IRS cannot initiate an audit of your tax return unless there is a suspicion of tax fraud.
The IRS has 10 years to collect outstanding tax liabilities
This is measured from the day a tax liability has been finalized. A tax liability can be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever because the statute of limitations on collecting the tax has expired.
ACTION ITEM: Every taxpayer needs to understand how the statue of limitations works.
Thomas F. Scanlon, CPA, CFP®