IRS Statute of Limitations

IRS Statute of Limitations

IRS Statute of Limitations 

When it comes to tax matters — domestic of international — one of the most important concepts is the statute of limitations. That is because if the statute of limitations has expired, then the IRS can no longer pursue the Taxpayer for that specific violation. The idea behind the IRS Statute of Limitations — otherwise known as limitations on assessment and collection — is that at some point in time “too much time has passed” to either assess or collect certain taxes, penalties, and interest. Otherwise, it would be completely unfair for a Taxpayer who may have committed a tax violation some 25 or 30 years ago to suddenly be hit with an assessment or enforcement by the IRS — as well as penalties and interest, the latter which would be astronomical. An IRS statute of limitations in general will vary depending on the specific type of tax violation. When the violation is very serious such as murder — there is generally no statute of limitations. In the world of tax, civil fraud has no statute of limitations either — although in general courts have not always been inclined stand enforcement indefinitely. Let’s take a walk through 26 USC 6501 IRS Statute of Limitations and Collections:

26 USC 6501 (IRS Statute of Limitations) 

(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 generally, the Internal Revenue Service has three years to assess tax. It is important to note that until the tax return is filed the IRS statute of limitations does not begin to run. Therefore, by simply not filing a tax return the Taxpayer is not running out clock — they are just stalling the inevitable. Once the return is filed (whether timely or late), IRS gets three years after the return was filed to assess tax.

When the tax return is filed before the due date, the IRS still gets three years from the due date to assess tax.

 26 USC 6501 (b)(1) Time Return Deemed Filed

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.

26 USC 6501 (e) Exceptions to the Three-Year Rule

As with anything related to tax, there are various exceptions, exclusions and limitations to the IRS statute of limitations — which extends the statute of limitations — and thus the time for the IRS to pursue the assessment and collection tax:

        • (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.

Substantial Omission of Items Six-Year (6) IRS Statute of Limitations

When there has been a substantial omission of income, the IRS statute of limitations (time to collect or assess tax) is extended to six years. There are two common situations in which a “substantial omission” occurs. In the first scenario, the Taxpayer omits more than 25% of their gross income in the return. In the second instance, the Taxpayer has income that was generated from foreign assets — that result in more than $5,000.00 of omitted gross income from the tax return. In the latter scenario, a common situation is when a taxpayer has foreign accounts that generate more than $5,000.00 a year– and that income was not included in the tax return.

(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.

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