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Statute of Limitations

The IRS can only take actions and collect payments for a certain number of years. They are bound by an established Statute of Limitations. As a general rule, the IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due.

TAX REFUNDS

Taxpayers have three years from the date of the original deadline of the tax return or two years from the date the tax was actually paid to make a refund claim, whichever is later. If you file an extension, it extends the period for claiming refunds. In some instances, the three year limit can be extended.

Taxpayers have up to seven years to claim a refund resulting from deductions for bad debt or worthless securities.

The three-year statute of limitations does not apply in the situation where taxpayers are unable to manage their financial affairs due to physical or mental impairments.

TAX AUDITS

The IRS has three years from the due date to audit your tax return. If filed late, the clock starts on the day you actually filed your tax return.

However, there are three exceptions to the above rule:

  • Substantial Understatement: The IRS has six years from the date a return is filed to audit a tax return if the taxpayer omits income of more than 25% of what should have reported.
  • Offshore Accounts: The IRS  has six years to audit a tax return if the taxpayer did not report a foreign asset of  more than $5,000.
  • Fraud: The IRS  has six years to audit a tax return if the taxpayer files a false or fraudulent tax return.

COLLECTION

The IRS has ten years to collect a tax liability from the day the liability was finalized. Finalization occurs when the taxpayer reports the liability on the return or the IRS imposes a liability as a result of an audit, among several other circumstances.

The IRS is barred from collecting any amount not paid within the ten year Statute of Limitation.

However, there are a number of ways the ten year Statute of Limitations on collections can be suspended, or “tolled”.  Some examples for a period of tolling are:

  • During the period the IRS is reviewing an Offer in Compromise, Innocent Spouse Relief, Installment Agreement and  Collection Due Processing hearing,
  • During the period for which a taxpayer is under the Automatic Stay of bankruptcy protection plus an additional six months,
  • During periods for which the taxpayer resides outside the United States for at least six months.

Due to the number of exceptions and ways the Statute of Limitations can be tolled, it is important to contact a tax professional, such as Datta Law Group, to learn the actual dates from which the IRS is barred from collecting tax liability.

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