IRS Audit Statute of Limitations

The Internal Revenue Service (IRS) makes every effort to examine tax returns as soon as possible after they are filed. Moreover, an IRS audit can take time to complete, but the IRS cannot extend the audit indefinitely. To ensure timely tax examinations, Congress has set deadlines for assessing taxes and making refunds or credit of tax. Additionally, the timeline is called the IRS audit statute of limitations. These deadlines are called statute of limitations. Without statute of limitations, a tax return could be examined and tax assessed, refunded, or credited at any time, regardless of when the return was filed.

Statutes of limitations generally limit the time the IRS has to make tax assessments to within three years after a return is due or filed, whichever is later. That particular date is also referred to as the statute expiration date. Statute of limitations will also limit the time you have to file a claim for credit or refund.

Congress, recognizing that additional time may sometimes be needed to fairly resolve a tax examination, has provided for extending the statutory period by written agreement between you and the IRS. These agreements, Form 872, Consent to Extend the Time to Assess Tax, are called “consents” and generally apply to all taxes except estate tax. Notification is usually made by sending Letter 907, with the most recently revised Publication 1035, Extending the Tax Assessment Period, and the applicable agreements.

Overview of the IRS audit statute of limitations

The Internal Revenue Code (IRC) requires that the Internal Revenue Service (IRS) assess, refund, credit and collect taxes within specific time limits, known as the statute of limitations. Moreover, when the statute of limitations expires, the IRS can no longer assess additional tax, allow a claim for refund by the taxpayer or take collection action. The determination of statute expiration differs for assessment, refund and collection.

An assessment is the recording of a taxpayer’s tax liability on the IRS’s books. It is critical to tax administration because the IRS cannot collect a tax unless there has been an assessment. One of the most important aspects of the IRS examiner’s job is protecting the statute of limitations of the tax returns placed in the examiner’s inventory. This Practice Unit provides an overview of the statute of limitations on the assessment of tax and related penalties. Its purpose is to help examiners determine the correct statute of limitations on a federal income tax return.

IRC 6501 is the main source of legal authority related to statute of limitations. Under IRC 6501(a), the government generally has three years after the return is filed to assess the tax and to begin any court proceeding without assessment for the collection of any tax. In general, the filing of a tax return is the event that triggers the running of the statute of limitations on assessments; however, the date
the limitations period begins to run differs for timely and untimely filed returns. A return is considered filed on its due date if the return was filed on or before its due date.

Exceptions to the 3 year rule

Congress has drafted exceptions to the IRS audit statute of limitations. In general, a return is filed on the date that it is received at the place designated for filing by the Service. While the determination of the received date is one of the most important factors, it does not necessarily establish the filing date. The filing date is established after applying the relevant IRC sections.
As a general rule, tax on an income tax return must be assessed within three years of the filing of that tax return. There are, however, circumstances where the general rule does not apply, such as:
1. No return filed – IRC 6501(c)(3) (failure to file a return)
2. Receipt of certain amended returns – IRC 6501(c)(7)
3. Extension of statute of limitations by agreement – IRC 6501(c)(4)
4. Waiver of statute of limitations defense on a closing agreement – IRC 6213(d) and 7121
5. False or fraudulent tax return – IRC 6501(c)(1) and 6501(c)(2)
6. Substantial omission of gross income – IRC 6501(e)(1)(A)(i)
7. Failure to report more than $5,000 in income attributable to specified foreign financial assets – IRC 6501(e)(1)(A)(ii)
8. Failure to furnish information regarding foreign transfers – IRC 6501(c)(8)

Can I agree to extend the IRS audit statute of limitations?

Under IRC 6501(c)(4), the taxpayer and IRS can agree to an extension of the statute of
limitations on assessment by entering into a written agreement. This agreement is
memorialized on Form 872 (or a similar form). The critical factor in agreements by consent is
the requirement that the statute of limitations must still be open when the agreement is
executed by both parties. It is an agreement to extend the statute of limitations on
assessment, not an agreement to revive an expired statute of limitations.

If you or your business is experiencing an IRS audit, contact a tax attorney at Disparte Tax Law at www.losangelestaxattorney.com to discuss the best strategy, and how how the IRS audit statute of limitations applies. Moreover, preparing for an IRS audit is extremely important.