What is an IRS Statute of Limitations in Federal Tax Law?

What is an IRS Statute of Limitations in Federal Tax Law?

Statute of Limitations

What is a Statute of Limitations in Federal Tax Law:  When it comes to violating an IRS Tax Law, Rule or Regulation, the Internal Revenue Service only has a limited amount of time to pursue the Taxpayer for the violation — in order to assess and collect taxes and penalties. A Statute of Limitations refers to how much time the IRS (or other Government Agency) has with a particular enforcement or collection protocol. In other words, different statutes of limitations provide the IRS and US government wth different amounts of time to pursue a violation of the code — and the times vary per statute. For example, the Statute of Limitations for the IRS to pursue an audit or examination is typically three-years (3) or six-years (6). Alternatively, the IRS has a nearly unlimited Statute of Limitations when it comes to pursuing Civil Tax Fraud — while most criminal violations have a 3-6 year statute of limitations when it involves tax related matters. The reason why an IRS Statue of Limitations is so important is because if the time to pursue the taxpayer has expired, then the IRS typically loses The ability to pursue the matter — even if they have facts sufficient to do so. Let’s go through some of the basics a federal tax law and the Statute of Limitations rules.

General Federal Tax Statute of Limitations is 3-Years

In general, the Internal Revenue Service has three (3) years to enforce a tax action.

As provided by the IRS:

      • 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. 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.

      • Taxpayers and the IRS may extend the statute of limitations by signing a mutual agreement. In some circumstances, the statute of limitations does not begin to run even though the tax return has been filed. Congress has also recognized that on rare occasions the 3-year general rule does not provide the IRS with sufficient time to identify and audit some non-fraudulent returns. As a result, Congress has provided some exceptions to the general rule. See the Index of Related Practice Units for a list of Practice Units that provide a closer look at exceptions to the 3-year statute of limitations.

26 U.S. Code § 6501 – Limitations on Assessment and Collection

Internal Revenue Code section 6501 is the primary code section involving the Statute of Limitations. Let’s let’s break the code section down piece by piece:

(a) General Rule

  • Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period.

  • For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

What does this Mean?

It means that under most circumstances, the IRS has a 3-Year Statute of Limitations to enforce a statutory violation against a Taxpayer and assessing tax violations for previous taxes the IRS believes are due.

(b) Time Return Deemed Filed

      • (1) Early return: For purposes of this section, a return of tax imposed by this title, except tax imposed by chapter 3, 4, 21, or 24, filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on such last day.

      • (2) Return of certain employment and withholding taxes For purposes of this section, if a return of tax imposed by chapter 3, 4, 21, or 24 for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, such return shall be considered filed on April 15 of such calendar year.

      • (3) Return executed by Secretary Notwithstanding the provisions of paragraph (2) of section 6020(b), the execution of a return by the Secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection.

      • (4) Return of excise taxes For purposes of this section, the filing of a return for a specified period on which an entry has been made with respect to a tax imposed under a provision of subtitle D (including a return on which an entry has been made showing no liability for such tax for such period) shall constitute the filing of a return of all amounts of such tax which, if properly paid, would be required to be reported on such return for such period.

What does this Mean?

Essentially, it means that in most cases when a tax return is due on April 15th that even if a taxpayer submits the return and pays the tax early — the IRS statute of limitations for that year still begins on April 15. In other words, by filing a tax return prior to April 15, it does not limit th3 three year statute of limitations. Likewise, if a taxpayer files after April 15th , then the due date will be at the time the return is filed.

(c) Exceptions

(1) False Return

      • In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

(2) Willful Attempt to Evade Tax

      • In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

(3) No Return

      • In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. 

What does this Mean?

The three above reference subsections relate to typical exceptions to the three-year statute of limitations. If a taxpayer acted fraudulently, the IRS can make the claim that there is no statue of limitations. Likewise, if no tax return was filed then the statute of limitations does not begin.

(e) Substantial Omission of Items

  • Except as otherwise provided in subsection (c)—

  • (1) Income taxes In the case of any tax imposed by subtitle A—

(A) General rule

  • If the taxpayer omits from gross income an amount properly includible therein and—

  • (i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or

  • (ii) such amount—

  • (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

  • (II) is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.

(B) Determination of gross income For purposes of subparagraph

  • (A)— (i)In the case of a trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services;

  • (ii)An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income; and

  • (iii) In determining the amount omitted from gross income (other than in the case of an overstatement of unrecovered cost or other basis), there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.

(C) Constructive dividends

  • If the taxpayer omits from gross income an amount properly includible therein under section 951(a), the tax may be assessed, or a proceeding in court for the collection of such tax may be done without assessing, at any time within 6 years after the return was filed.

IRC 6501(e)(1) & International Tax Statute of Limitations

In accordance with the introduction of FATCA and IRC 6038D, there was an addition to section 6501 which expanded the time for the IRS from three years to six (6) years in situations in which a person has income generated from certain FATCA related assets — and the total income exceeds $5000.

Internal Revenue Manual (IRM) 25.6.1 & Statute of Limitations

The Internal Revenue Manual is a manual designed to assist IRS personnel with how certain procedures should work — and it also allows taxpayers and practitioners an idea of how the agents and examiners will operate on certain issues.

The below section is reproduced from the Internal Revenue manual and is a glimpse into how the statute of limitations is applied.

IRM 25.6.1.2

      • What is a Statute of Limitation

      • A statute of limitation is a time period established by law to review, analyze and resolve taxpayer and/or IRS tax related issues.

      • The Internal Revenue Code (IRC) requires that the Internal Revenue Service (IRS) will assess, refund, credit, and collect taxes within specific time limits. These limits are known as the Statutes of Limitations.

      • When they expire, 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.

      • The Statutory Period of Limitations Chart below shows the due date of the various tax returns (under section 6501 of Internal Revenue Code of 1986). The information is displayed by the Form Number, MFT Code, Type of Tax return, Period Covered, Due Date and Statutory Period of Limitations.

 

Form Number Master File Tax (MFT) Code Type of Return Period Covered Due Date Statutory Periods of Limitations
1040, 1040A, 1040EZ 30 Individual Income Calendar or Fiscal Year 3-1/2 Months after end of taxable year (calendar year April 15th) 3 years after the due date of the return, or 3 years after the date the return was actually filed, whichever is later.
1040C 30 U.S. Departing alien individual Prior to departure Tentative return Statute begins with received date of 1040 or 1040NR when filed.
1040NR 30 U.S. Non-resident alien individual Same as 1040 See notes 2 and 3 See note 1
1040PR 30 Self-employment tax return (Puerto Rico) Same as 1040 Same as 1040, see note 3 See note 1
1040SS 30 Self-employment tax return (Virgin Islands, Guam, American Samoa) Same as 1040 Same as 1040, see note 3 See note 1
1042 12 Annual return of income paid at the source Calendar March 15 See note 3
CT-1 09 Railroad Retirement Calendar On or before the last day of February following the end of the calendar year. See IRM 25.6.1.9.10.5, Railroad Retirement Board
706 52 Estate Filed Due 9 months after date of death See note 1

The following contains the list of the ten notes referenced above in paragraph 1:

      • Note: (1) Three years after the due date of the return, or three years after the return was actually filed, whichever is later. For decedents dying after December 31, 2009 and before December 17, 2010, the due date for Form 706 is September 19, 2011.

      • Note (2) Form 1040NR has the same due date as Form 1040 if wages are subject to withholding of U.S. Income Tax. Otherwise, the due date would be the 15th day of the 6th month (June 15th for the calendar year filer).

      • Note: (3) Form 1042 is processed at the Ogden Submission Processing Campus, 1040-NR, 1040-PR and 1040-SS are processed at the Austin Submission Processing Campus. Form 1120-F has a due date of June 15th if the corporation does not maintain a corporate office within the U.S., otherwise the due date will be two and one-half months after the end of the taxable year.

      • Note: (4) Form 1120 filed as a result of the Form 990 filer being converted by Exam to a taxable entity will carry the statute limitation/expiration as determined by the original Form 990 filing.

      • Note: (5) Form 706-A is filed under each heir’s Social Security Number (SSN), benefiting from the sale of assets from the estate and is processed to Non-Master File under the beneficiary’s SSN. Each Form 706-A filed starts its own statute expiration date regardless of when the decedent Form 706 was received.

      • Note: (6) Form 709- For gifts made after December 31, 1976, the law changed the due date of a quarterly return. As of January 1, 1977, a return must be filed by the 15th day of the 2nd month following the first calendar quarter that taxable gifts for the year were more than $25,000. After that, a return must be filed by 15th day of the 2nd month after any later quarter that the cumulative unreported gifts again were more than $25,000. From January 1, 1982 through December 31, 2001, a return must be filed yearly, by April 15th, after the year the gifts are made in excess of $10,000.00, for 2002 – 2005 the amount in excess of $11,000, for 2006 – 2008 the amount in excess of $12,000 and $13,000 for gifts in 2009, for 2010- 2012 the amount in excess of $13,000, for 2013- 2017 the amount in excess of $14,000, for 2018 the amount in excess of $15,000.

          • If gifts for the year were $25,000 or less, only a fourth quarter return was required. This return could contain gifts made in all 4 calendar quarters.

          • From 1-1-77 through 12-31-78, all quarterly returns filed were due one and one-half months after the quarter ended. Beginning with 1-1-79 through 12-31-81, a 4th quarter return was due to be filed within three and one-half months after the quarter ended (4-15).

About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance.

Contact our firm for assistance.