A frequent question that we are asked is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:
You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2014 return on February 15, 2015 or April 15, 2015, the statute did not start running until April 15, 2015.
You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2014 return is on extension until October 15, 2015, and you actually file on September 1, 2015. The statute of limitations for further assessments by the IRS will end on September 2, 2018. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.
If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. We also retain the confirmation for you. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.
You file an amended tax return– If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.
You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three-year statute of limitations is increased to six years.
In determining if more than 25% has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services.
You file three years late – Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties.
However, the statute of limitations that applies to your refund or credit claim depends on whether or not you filed a return. If you filed a return, the claim for refund or credit must be filed within three years of the date the return was filed or within two years of the date the tax was paid, whichever is later. If you were not required to file a return, the claim for credit or refund must be filed within two years of the date the tax was paid.
Example: John filed his 2005 tax return, which included a claim for refund, with the IRS on March 20, 2011. John's taxes for 2005 had been timely paid on April 15, 2006, because John's employer had withheld federal income taxes from his paychecks in 2005 and had submitted the payments to the IRS on his behalf. Although the two-year window for filing a refund claim expired on April 15, 2008 (two years after his withholding tax was paid to the IRS), the three-year window for filing a refund claim did not expire until March 20, 2014 (three years after the 2011 filing of his 2005 tax return). Thus, because John filed his claim for refund simultaneously with his 2005 tax return, his claim for refund is timely because it was filed within three years of the filing of his tax return and well before the closing of the later window on March 20, 2014.
Furthermore, there are a number of special circumstances in which a different statute of limitations period applies to the filing of a claim for refund or credit:
(1) If you and the IRS have executed a written agreement that extends the statute of limitations for the assessment of tax and that agreement was executed within the statute of limitations period for filing a claim for refund or credit discussed above, the period of the latter statute of limitations is extended to a date six months after the expiration of the former statute of limitations.
(2) If a claim for refund or credit relates to an overpayment of income tax that is attributable to bad debts or worthless securities, a seven-year statute of limitations applies.
(3) If a claim for refund or credit relates to an overpayment of income tax that is attributable to a net operating loss carryback or a capital loss carryback, the statute of limitations for filing a claim for refund or credit is extended to a date three years after the due date of the return for the tax year in which the net operating loss or net capital loss arose.
(4) If a claim for refund or credit relates to an overpayment of income tax that is attributable to a foreign tax credit, a ten-year statute of limitations applies.
(5) If a claim for refund or credit relates to an overpayment of income tax that is attributable to an unused general business credit carryback, the statute of limitations for filing a claim for refund or credit is extended to a date three years after the due date of the return for the tax year in which the general business credit arose.
10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.
Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.
Also, late filed returns are actually looked at by a person at the IRS versus timely filed returns that are directly inputted into IRS’ computer system. Therefore, late filed returns have a higher chance of being audited.
The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.
David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.
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