IRS Statue of Limitations (Time to Assess, Collect, Get Refunds)

I think it is interesting that the Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specific time limits. These time limits or time constraints are called the statue of limitations. In other words the IRS does not have legal authority to audit or penalize the tax payer for an incorrect tax return outside of the statue of limitations time period. The tax payer also needs to be careful as the taxpayer has time constraints from when they have to act to correct errors to get refunds on their returns. The statue of limitation laws for the IRS and Taxpayer are:

A)  IRS Statue of Limitations on Assessing Normal Filed Returns (3yrs or 2yrs from when taxes paid)

When you file a tax return the IRS has 3 years from the due date of the return (e.g., April 15) to assess taxes and penalties on that return (i.e., examine/audit your return, find an error and increase your taxes). If you paid taxes late then the IRS has 2 years from the date you paid your taxes to assess additional taxes. The law is the IRS has 3 years from the due date of the return or 2 years from the date you paid your taxes whichever is later to find errors and increase the taxes due on that return.

B) IRS Statue of Limitations on Assessing returns that have >25% of unreported Gross Income. (6 yrs)

If the reported gross income on your return has >25% of unreported income then the IRS has 6 years from the due date of the return to asses taxes and penalties on that return. This is twice the normal 3 year limitation if you have a smaller % of unreported income.

C) IRS Statue of Limitations on Assessing Fraudulent returns or Unfiled returns (no limitation)

If you did not file a return or if you filed a fraudulent return the IRS has no statue of limitations to asses taxes and penalties on your return. There is no time limit for them to penalize you.

D) IRS Statue of Limitations on Collecting owed Taxes

The IRS has a 10 year Statue of limitations on collections. This means once your taxes have been assessed the IRS has 10 years from the date the taxes were assessed to collect the owed taxes. After that period of time the IRS is barred by law from collecting taxes from you. This time period can be extended. If you file an offer in compromise to pay your tax debt, or if you file for bankruptcy, or if you file an innocent spouse request, or if you file a collection due process appeal then your actions can extend the statue of limitations and give the IRS more than 10 years to collect the owed taxes.

After the IRS statue of limitations is met and the IRS can no longer collect from you they will make an adjustment to their records and credit your account for the amount of unpaid taxes, interest, and penalties. Your transcripts will have an entry that says the “Time Frame to Collect Expired” along with a zero balance which will verify that you no longer owe them.

Getting close to the 10 year collection Statue of Limitations can cause the IRS to do what is called a Jeopardy Levy. This means if they think their collection of a tax deficiency is in jeopardy they can waive a 10 day notice of demand, and/or waive the 30 day Notice of Intent to Levy and immediately seize (levy) your accounts and property to collect what is owed them.

E) Taxpayer Statue of Limitations to file for a credit or refund (3 yrs or 2 yrs after taxes paid).

If you discover an error that if corrected would increase your refund on your tax return you have the later of 3 years from the due date of your return or 2 years from the date you paid the taxes on the return to file an amended return to claim a refund. So if you discover a mistake or something that would reduce your taxes you only have 3 years to get your money back. After the statue of limitations runs out you have no opportunity to correct the mistake and get your money back. If you have not filed your taxes for 10 years and if you filed the returns you would have received money back for all those years then you are legally only allowed to get your money back on the last 3 years. All the refunds from returns older than 3 years are no longer available to you due to the statue of limitations.

 F) Taxpayer Statue of Limitations on claims for loss of worthless securities ( 7 yrs)

If you claim a worthless stock deduction loss then you have a 7 year statue of limitations from the due date of the return to file the loss rather than normal 3 years.