What are Statutes of Limitations?

Statutes of Limitations are deadlines established by Congress in the Internal Revenue Code for the assessment of taxes and the making of credits or refunds to taxpayers to ensure timely tax examinations. Statutes of Limitations (SOL) are intended to prevent the examination of a return many years after a return is filed. Possibly long after documentation and responsible parties for the filed return are no longer available. Or, long after the demise of a troubled business. Generally the SOL limit the time a tax assessment can be made to within three (3) years of a return’s due date or filing date, whichever is later. The day the return is filed the SOL begins to run counting down the days the Service has left to examine a return and make a determination if additional taxes or a refund are due.

The SOL for a return timely filed on April 15th will end on April 15th three years following. Example: The SOL for a return filed April 15, 2014 will end April 15, 2017. If the return is filed late the filing date still is the start date of the SOL. Example: A return due October 15, 2012 is filed December 12, 2014. The SOL starts on December 12, 2014 and ends December 12, 2017. If the IRS files a substitute return the SOL starts on that date and the SOL clock is reset when the taxpayer files a return for that year replacing the substitute return with theirs. Example: The Service files the substitute return Feb 3, 2015 for the 2012 tax year. The taxpayer motivated by a notice of deficiency prepares and files a 2012 tax return May 14, 2017. The SOL for the Substitute return is Feb 3, 2018 and for the taxpayer’s filing is May 14, 2020.

The SOL applies to the taxpayer too limiting the time for filing amended returns, applications for refunds, or requests for credit to the SOL period. The Service is legally prohibited from making a refund or credit if the request is filed after the SOL ends. If the taxpayer disagrees with the findings of a return examination the Service will provide an administrative appeal only if sufficient time remains on the SOL. Otherwise the taxpayer must take it to court or seek an SOL extension.

Agreements between the Service and taxpayer to extent the SOL are termed “consents” and are made using various forms dependent on the return filed and type of extension sought. The extension allows the taxpayer to present additional evidence and the IRS time to complete an examination. Consents are one of two types; a) Fixed Date terminates on a specified date, b) Open-ended exist for an indefinite length of time, usually 90 days after either the taxpayer or Service sends the prescribed notice ending the agreement. The extension can be extended by agreement between the IRS and taxpayer. Some consent agreements may be restricted to specific tax issues and can be either fixed date or open-ended.  Restricted agreements are only made if certain conditions exist.

A taxpayer refusing to sign an extension leads may lead to assessments of taxes the Service determines to be due. Usually the taxpayer receives a Notice of Deficiency and administrative options are generally closed to the taxpayer in resolving the tax issue.

Bankruptcy proceedings suspend the SOL until the bankruptcy proceedings end at which time the SOL starts counting down the remaining time.

There is a special case where the SOL is extended to six (6) years when gross income reported on the return is understated by 25% or more. 

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