The IRS (Internal Revenue Service) typically has a 10 year statute of limitations to audit tax returns and assess additional tax liability. However, there are some exceptions that allow the IRS to go back further than 10 years. Understanding the statute of limitations rules is important for taxpayers who may have exposure to tax audits and additional taxes for prior years.
What is the normal statute of limitations for the IRS?
The normal statute of limitations for the IRS to assess additional tax liability is 10 years. This means the IRS generally has 10 years from the date you filed your tax return to audit it and charge you additional taxes.
For example, if you filed your 2013 tax return on April 15, 2014, the statute of limitations for the IRS to assess additional tax for 2013 would expire on April 15, 2024. After that date, the IRS would no longer be able to send you a tax bill for 2013 except in cases of tax fraud or substantial underreporting of income as explained below.
Some key points about the 10 year statute of limitations:
– The 10 years is counted from the date you actually file your return, not the due date of the return. So if you filed an extension and filed your 2013 return on October 15, 2014, the statute would run until October 15, 2024.
– If you never file a return, the IRS has no time limit to assess tax.
– The 10 year clock can be extended if both the IRS and taxpayer consent. This often happens when the IRS needs more time to review complex matters.
– The 10 year statute applies to the IRS assessing additional income taxes, penalties, and interest. It does not apply to you claiming a refund. You generally have only 3 years to amend a return to claim a refund.
So in most cases, after 10 years has passed from your tax return filing, you can rest easy knowing the IRS cannot come after you for additional tax for that year. But as we’ll see next, there are some big exceptions that extend the time period beyond 10 years.
When can the IRS go back further than 10 years?
While 10 years is the standard IRS statute of limitations, there are several important exceptions that give the IRS more time:
– You never file a return – As mentioned above, if you never file a return, there is no statute of limitations at all. The IRS can pursue taxes against you for that year no matter how long ago it was.
– Substantial understatement of income – If the IRS finds you understated your reported income by more than 25%, the statute of limitations is extended to 6 years. So the IRS would have 6 years from the date you filed the return to audit it and assess additional tax.
– Fraud – If your return involves fraudulent activity, the IRS has no time limit to audit and assess additional tax. Some examples of fraud include deliberately not reporting income, overstating deductions, hiding money in offshore accounts, participating in sham transactions, and using a fake Social Security number.
– No limit for false return – If you file a fraudulent return, there is no statute of limitations on assessment for that return.
– Tax not paid – The 10 year limitation only applies to the IRS assessing additional taxes. If you still owe outstanding taxes, interest, and penalties, the IRS can still try to collect on that debt beyond 10 years. The IRS generally has 10 years to collect taxes after an assessment is made.
– Retirement accounts – Distributions from IRAs or qualified retirement plans that were not reported properly can be assessed tax by the IRS indefinitely. There is no statute of limitations on under-reported income related to these accounts.
The exceptions for substantial understatement, fraud, false returns, and retirement accounts mean the IRS has unlimited time to audit and assess tax if any of those situations apply. The normal 10 year clock doesn’t start until you file an accurate, non-fraudulent return.
What if you failed to file certain forms like the FBAR?
Some special foreign reporting forms like the FBAR (Report of Foreign Bank and Financial Accounts) have their own statutes of limitations.
Up until recently, there was no statute of limitations on assessing penalties for failure to file FBAR forms. But a recent court case limited the open period to 6 years. So if you failed to file one of these required foreign disclosure forms, the IRS generally has 6 years to assess penalties against you.
The IRS also has unlimited time if they find a willful violation of failure to file FBAR forms. So if you intentionally did not file in order to hide assets or income, there is no statute of limitations for the IRS to assess large penalties against you.
When does the statute of limitations start if you amend a return?
If you file an amended tax return that includes additional tax liability, the IRS time limit to assess tax runs from the date you filed the amended return.
For example, say you filed your 2018 taxes on time in April 2019. But then in July 2022 you realized you made a mistake that resulted in $5,000 of additional tax. You amend your 2018 return and file it on August 1, 2022 and pay the additional $5,000 tax. For that additional tax liability, the IRS now has until August 1, 2032 to audit your amended return. The normal statute of limitations for your original 2018 return already expired on April 15, 2029.
Amending a return to claim a refund does not extend the statute of limitations for the IRS. The IRS still only has the standard time frame (typically 3 years for a refund) to audit your original return, regardless of when you file an amendment.
When does the statute of limitations start for a partnership or S-corporation?
For partnerships and S-corporations, the statute of limitations on audits starts on the date the partnership or S-corp files its information return (typically a Form 1065 or Form 1120S). This return is separate from any individual partner/shareholder returns.
So the IRS has 10 years from the date the partnership or S-corp files its return to audit the entity and make any adjustments. Audit adjustments at the entity level can then flow through to the individual partners/shareholders returns.
Does the statute of limitations apply to state tax returns?
The federal statute of limitations rules explained here only apply to federal income tax returns and the IRS. Many states have their own statutes of limitations for auditing state income tax returns and assessing additional state tax liability.
In some cases the state rules may closely mirror the federal, but this can vary by state. Check with your particular state’s tax agency to understand the statute of limitations for state tax audits and assessments.
Can you rely on the statutes of limitations to avoid an audit?
It’s generally not wise to rely on the statutes of limitations as a way to avoid tax compliance or an audit. First, taking a lax approach can end up triggering one of the exceptions that greatly extend the time period like fraud.
Plus, purposely not reporting income or filing returns can lead to criminal tax charges that have no time limit for prosecution. Relying on statutes of limitations to avoid taxes is not a recommended approach.
How can a tax audit be extended beyond the statutes of limitations?
There are certain scenarios where a tax audit may be extended beyond the normal statutes of limitations:
– Taxpayer and IRS consent – At any time, the taxpayer and the IRS can mutually consent in writing to extend the statutes of limitations to allow more time to review issues or provide documents. This often happens if the audit is complex.
– Litigation – If the IRS issues a tax assessment and the taxpayer files a petition to the Tax Court, the statutes of limitations are extended indefinitely while the court case is pending. This prevents the clock from running out while waiting on a decision.
– Bankruptcy – If a taxpayer files bankruptcy, the IRS time to assess tax is extended up to 60 days after the bankruptcy proceedings are over.
– Disaster extensions – If there is a presidentially declared disaster, the IRS may provide extensions to impacted taxpayers in that region, which can include extending statutes of limitations.
So in certain cases, taxpayers and the IRS can work together to pause the clock if they mutually need more time to finalize audits or litigation. Disasters can also result in across-the-board extensions.
Does the statute of limitations limit IRS collection after assessment?
The 10 year statutes of limitations applies to assessing additional amounts owed. Once an assessment is made, the IRS also has a limited time frame to actually collect on the amounts owed:
– 10 years to collect – After tax is assessed, the IRS generally has 10 years to pursue collection through actions like wage garnishment, bank levies, and property liens. The collection statute runs from the assessment date.
– Tolling during Collections Due Process – If a taxpayer exercises their right to a Collections Due Process hearing for liens or levies, that time period tolls (suspends) the collections statute. This prevents it from running out during appeals.
– Indefinite for unsatisfied liens – If the IRS files a tax lien against property, that lien remains attached to the property indefinitely until the tax liability is satisfied. The IRS can still pursue collection efforts beyond 10 years to redeem property with outstanding liens.
So the collections timelines do not strictly cut off the IRS like the assessment statutes of limitations do. The IRS has more flexibility to continue pursuing active collection efforts over long time periods, especially when tax liens are involved.
When can the statute of limitations be extended beyond 10 years?
There are limited situations where the IRS 10 year statute of limitations can be extended:
– Written consent by taxpayer – At any time, you can agree in writing with the IRS to extend the assessment timeline. This provides more time to find records or work through audit issues. Extensions are usually in 1 year increments.
– Tax Court litigation – If you petition the United States Tax Court to challenge an IRS tax assessment, the statute is extended indefinitely until the court case resolves. This prevents it from expiring during legal proceedings.
– Failure to disclose foreign assets – Assessments for failures to report foreign assets or offshore activity can be extended to 6 years. Certain willful violations have unlimited statutes of limitations.
– Presidentially declared disaster – If the President declares a disaster, the IRS may announce special extensions for taxpayers impacted by that event. This usually involves extending statutes to file returns and pay taxes.
– Lower assessment for carryback years – Net operating loss and capital loss carrybacks to prior tax years can result in lower assessments in those years. The IRS gets additional time to make such reduced assessments equal to the carryback period – so 2 years for NOLs and 3 years for capital losses.
Outside of those situations, the standard 10 year assessment limitation cannot generally be extended further by the IRS. You would have to voluntarily agree to a longer limitations period.
Does the statute of limitations limit IRS collections after assessment?
The 10 year statute of limitations applies to the IRS assessing additional tax amounts owed. Once an assessment is formally made, the IRS also has a limited time period to actually collect on unpaid amounts:
– 10 years from assessment date – The IRS generally has 10 years from the date of assessment to pursue active collection methods like bank levies, wage garnishment, and filing property liens.
– Tolling during CDP appeals – If you exercise your right to a Collections Due Process appeal for a proposed levy or lien, that time tolls (suspends) the statute during the appeals process. This prevents it from expiring.
– Indefinite for unsatisfied liens – If the IRS files a tax lien on property, that lien remains attached to the property until the tax debt is satisfied. This allows collection efforts to continue beyond 10 years.
– Local law limitations on liens – While federal liens have no expiration, local laws may impose timing restrictions on the IRS redeeming property after a certain number of years.
So unlike the strict assessment limitations, the IRS has more flexibility on collections. They can continue pursuing active collection for 10 years, and indefinitely on perfected tax liens until the debt is paid.
Conclusion
While the standard IRS statute of limitations for assessing additional tax is 10 years from filing, there are number of exceptions that can extend this period or eliminate it entirely. Tax fraud, substantial underreporting, failure to file returns, issues with retirement accounts, and foreign reporting omissions are some key areas that allow the IRS extra time to audit and assess taxes.
Relying on statutes of limitations to avoid tax compliance is generally unwise and can even trigger some of the exceptions for fraud and intentional misconduct. However, for ordinary taxpayers who properly report income, claim legitimate deductions, and file accurately, the 10 year assessment limitation does provide eventual closure from an audit. Being aware of the statute rules can help you understand your risks and timeline of exposure from an IRS enforcement action.
