7 Exceptions to the IRS Statutes of Limitations Rule That Spell Trouble
As a company that helps resolve tax issues for clients, we are frequently asked if there’s a statute of limitations for taxes. Is there a point in time when tax returns are deemed too old to audit and off-limits for the IRS?
The short answer? Yes.
The long answer? There are many exceptions to the statute of limitations. Due to this, it would be more efficient to explain the statute exceptions instead of the statute of limitation rules. More on IRS statute of limitations exceptions.
Though the majority of the statute of limitations exceptions are common sense, there are a few that may compel you to double-check last year’s tax return. Learn about handling tax debt before major financial decisions.
What Is A Statute Of Limitations?
Simply put, a statute of limitations is a law that regulates how long parties have to settle a dispute. Find out more at Cornell Law School’s Legal Information Institute.
In regards to taxes, the IRS only has a certain amount of time to audit your filed tax return. Discover the details on IRS audits.
Is There A Statute Of Limitations On Taxes?
The IRS must estimate, collect, refund, and credit taxes within the statute of limitations timeline. The statute of limitations is generally 3 years. After this timeframe, the IRS can’t evaluate more taxes or allow the taxpayer to receive a refund.
In other words, once the statute of limitations for a tax return has expired, the taxpayer is “safe” from the IRS auditing their tax return. Understand more about this from Nolo’s legal experts.
There is a huge exception though. If your filed tax return violates the tax return guidelines, you may remain open to an audit, despite the 3-year statute of limitation rule.
Statute Of Limitation Guidelines
Due to the IRS’s calculation of how much the taxpayer owes, the statute of limitations can differ with each case. Without assessment, the IRS can’t collect tax.
The first step is to determine when the tax return is due. This takes into account any extensions the taxpayer has been granted. The original deadline is April 15th of each year. If you’ve been granted an extension, your tax return is due exactly 6 months after the original deadline.
The statute of limitations officially begins when the taxpayer files a valid tax return. If the taxpayer submits their tax return before the original tax deadline, the statute of limitations starts on the original deadline.
Statute Of Limitations Exceptions
Though we talked about how the general statute of limitations is 3 years, there are exceptions to this rule of thumb.
Though a rare occurrence, the government allows the IRS some exceptions so that they have time to investigate suspicious tax returns. All of the statute of limitation exceptions will be listed and explained below.
1. No Return Filed – IRC 6501(c)(3) Receipt of certain amended returns
The first, and perhaps the most obvious exception to the statute of limitations, is not having a filed tax return! Learn about the importance of filing your taxes.
As we mentioned earlier, the statute of limitations cannot officially begin without a valid tax return. So, not having a return filed at all would impede the start of the process.
Once the tax return for the year is filed, then the statute will start.
2. Extension Of Statute Of Limitations By Agreement (IRC 6501(c)(7))
If both the IRS and the taxpayer agree to extend the statute of limitations, then this would qualify as an exception.
The only requirement for this is that the statute of limitations must be in duration when this agreement is reached. An expired statute is not available to be resuscitated in this situation.
You may be wondering why a taxpayer would agree to extend their statute of limitations. This often happens when the IRS is still auditing a case and time is running out for them to complete their audit.
Rejecting to extend the statute could be viewed as failing to cooperate with the IRS, which wouldn’t look good for the taxpayer when the case goes to tax court. Learn more about appealing an IRS audit.
If you’re interested in this option, you must submit Form 872 (Consent to Extend the Time to Assess Tax).
3. Waiver Of The Statute Of Limitations Defense On A Closing Agreement (IRC 6501(c)(4))
If a taxpayer and the IRS end up in tax court, if the statute of limitations had already expired, this is a winning defense for the taxpayer. The case would otherwise be invalid.
But, if the taxpayer agrees to waive the statute of limitations as a defense in court, then the IRS can still assess the tax despite the lack of a statute. Information on tax extensions and payments.
If you wish to proceed with this statute exception, then you must submit Form 906 (Closing Agreement On Final Determination Covering Specific Matters).
4. False Or Fraudulent Tax Return (IRC 6213(d) And 7121)
This statute of limitation exception is quite obvious, as this was the main reason why the IRS was granted the statute exceptions. Explore the consequences of tax evasion vs tax fraud.
Though you should never submit an incorrect tax return (either by accident or on purpose), when you realize what this means for your statute of limitation timeline, it will be even more unpleasant.
If a tax return is found to be false, fraudulent, or found to purposefully evade taxes, then the tax return will have no statute of limitations. In other words, the tax return will be fair game for the IRS, whenever they would like to pursue it.
5. Substantial Omission Of Gross Income (IRC 6501(c)(1) And 6501(c)(2))
If the taxpayer excludes over 25% of gross income from the tax return, this increases the timeframe of the statute of limitation.
Instead of the standard 3 years, the statute is bumped up to 6 years. More on IRS home visits.
6. Failure To Report More Than $5,000 In Income Attributable To Specified Foreign Financial Assets (IRC 6501(e)(1)(A)(i))
For all tax returns filed after March 18th, 2010, the statute of limitations may increase when foreign accounts or assets are involved.
More specifically, if the taxpayer excludes more than $5,000 of gross income from a foreign financial asset, the statute of limitation is increased to 6 years. Learn about cryptocurrency taxes.
7. Failure To Furnish Information Regarding Foreign Transfers – (IRC 6501(c)(8) And IRC 6501(e)(1)(A)(ii))
If an American taxpayer owns any foreign entities (such as corporations or trusts), then the taxpayer is required by law to submit forms that will reflect his foreign interests.
If the taxpayer fails to file these forms, then, being strongly opposed to any benefits of omission by the taxpayer, the IRS has the right to view the tax return as not filed. Get insights on tax relief after natural disasters.
Again, if the tax return is deemed incomplete, then the statute of limitations won’t begin until the return is filed.
The Takeaway
As you can see, it’s in the taxpayer’s best interest to ensure all tax returns are filed to the best of their ability, as the IRS has the power to override the 3-year statute of limitations.
Here at Taxrise, we help those behind on their taxes catch up. We have helped thousands of Americans like you resolve their tax issues and erase their tax liability. Check out our free tax consultation!
