One of the most common query of taxpayers is: How long before I can be sure I am safe from the IRS ? Basically he is asking ” How long before he can consider himself safe from the IRS”? The answer to such question can not be ever be absolute , because the way Internal Revenue Code and other Rules and procedure are , one can only set general rules about the time limit after which a person can feel safe.The statute of limitations on assessment and the exceptions to the general rule are to be examined to understand whether IRS can take any action under the Code or not .
Limitation to Assess , Impose Tax & Penalty
As per IRC Section 6501, the IRS must assess additional tax and propose penalties no later than 3 years after either a tax return is filed or the return’s due date, whichever is later.If the IRS fails to assess additional tax and penalties within this 3-year period, it is timed barred from doing so. For ready reference , the section 6501(a) of US Code 26 given below :
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).
So , generally , you can think you are safe after three years from date of filing of tax return. In other words, generally , IRS audit can happen till three years from date of filing your taxes. But , I said generally !
Exception to 3 Years Time Limit
But there are are some exception to 3 years time limit. These exceptions are as under
- Bankruptcy by taxpayer,
- Issuance of a Notice of Deficiency by the IRS, and
- Taxpayer involvement in a third party summons enforcement action.
- You agreed for Extension of Limitation date
- Reassessment of Income
- Original return filed fraudulently
- No return was filed
(i) Bankruptcy by taxpayer
If a taxpayer files for bankruptcy protection, the IRS cannot assess a tax debt during the automatic stay period. As a result, the statute of limitation is suspended for the period of the automatic stay plus 60 days.
Where the IRS assess additional tax after bankruptcy, the taxpayer should confirm that the assessment was not made during a period for which the IRS was stayed from doing so. Failure by the IRS to properly and timely assess a tax debt after bankruptcy can invalidate the assessment.
(ii) Notice of Deficiency by the IRS
When the IRS issues a Notice of Deficiency to the taxpayer, the time limit is extended until either
- the 90 days for filing a tax court petition have passed and no petition was filed, or
- the taxpayer timely filed a petition with the tax court and the decision of the court is final. In addition, the IRS is given an additional 60 days after expiration of the applicable time period to make an assessment.
(iii) IRS Summons for Records
Statutory time limit is also extended during the period of any proceeding if the IRS summons records from a third-party and the taxpayer institutes a proceeding challenging the summons or intervenes in a proceeding to enforce the summons.
(iv) You Agreed for Extension of Limitation Date
If you and IRS signs a Form 872 agreement within the 3-year time limit by signing to extend the SOL to a specific date or a Form 872-A which extends the statutory time limit indefinitely. Please note that it is your option to accept or reject the request of IRS to extend the time limit.
(v) Reassessment of Income
IRS can initiate reassessment of your income under IRC 6501(e) for six years on the ground that you omitted items of income an amount exceeding 25% of the gross income that was shown on the original return, to declare in the original tax return . In other words, the statutory time limit to reassess income is six years .The relevant portion of section 6501(e) is given below for ready reference
(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 ruleIf the taxpayer omits from gross income an amount properly includible therein and—
However , if taxpayer establishes that the item of omitted income was disclosed in the return – or in a statement attached to the return – in a manner adequate to put the IRS on notice as to the nature and amount of such item.
vi) Original return filed fraudulently
Section 6501(c)(1) of the Internal Revenue Code provides no time limit if the IRS charges that the the original tax return was filed fraudulently with the intent to evade tax. The provision is
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.
The burden of proving that the original return was filed fraudulently is on IRS . Please note that there is great divide among various lower courts on the issue of suspension of the three year period of limitations for assessment for fraud or false return . Some courts held that the suspension of 3 years rule applies only when the taxpayer acts with the intent to evade tax, whereas others have held opposite.
vii. No Return Was Filed
Section 6501(c)(2) provides that where the taxpayer does not file a tax return, IRS can assess and raise tax bill at any point of time unless and until the taxpayer files a return. The IRC 6501(c)(3) is as under :
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.
If the taxpayer eventually files a late return, the 3 year SOL would apply, subject to the exceptions discussed above, and starts on the return filing date. Failure to file a return or filing a late return can have adverse consequences in bankruptcy.
As can be seen , the time upto which IRS can initiates tax audit of your tax return or initiates proceedings under IRC can vary from 3 years to infinite depending upon circumstances !
Did you read Eight Tax Return Items That May Attract IRS Audit ?