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- November 6, 2020
You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”.
With a statute of limitations, you can now have a definite answer. Why? Because a statute of limitations imposes time limits on when a party must initiate legal action or pursue debt (including tax debt).
So, is there a statute of limitations on taxes? In a nutshell, yes! The simple answer is that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed.
The more complete answer is, however, more complicated. The statute of limitations on IRS debt depends on many factors, including whether you have indeed filed the return, and whether you completed it accurately.
To help you better understand the details of the IRS collections statute of limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.
What Is the IRS Statute of Limitations?
Think of the IRS statute of limitations as a legally enforceable deadline.
The statute of limitations is a timeframe after which the IRS can no longer collect back taxes, or tax debt. The idea behind the statute of limitations is to give taxpayers some reassurance and certainty. In other words, it protects taxpayers from IRS collections arising many years later.
- There are different time limits depending on whether someone accidentally or deliberately accrued tax debt.
- Typically, though, once the “window” of time passes, the IRS must stop collection efforts.
- However, there are exceptions to every rule. In some cases, there’s no time limit and the IRS can pursue the tax debt indefinitely.
- Some events, such as filing for bankruptcy, “pause” the clock. But they don’t stop it completely.
Let’s now consider how long the IRS statute of limitations is and what influences the “clock”.
IRS Collections Statute of Limitations: The Law
We can find the laws regarding when the IRS must stop collection efforts in Title 26 of the Internal Revenue Code (IRC). You can also find this published under US Code 6501.
For our purposes, the most significant rules are as follows.
Statute of Limitations for Assessing Tax
The IRS statute of limitations allows 3 years after your return was due for assessing your return. In other words, the IRS has 3 years from the date on which your return was due to complete their assessment. There are exceptions if, for example, you filed a fraudulent return or your agreed to a time limit extension.
Statute of Limitations for Tax Fraud
The IRS has significant leeway for assessing – and collecting – tax debt where there’s suspected fraud or willful underpayments.
- Tax evasion (deliberately withholding tax): Up to 6 years after the filing date.
- Significant omissions: There is no time limit.
It’s crucial that you understand your tax liabilities and complete your tax return carefully. Attempting to evade tax obligations, or even careless mistakes, can have severe consequences.
The IRS normally has 5-6 years after an evasion attempt to prosecute. However, in some scenarios, such as if you lie to an IRS Criminal Investigation Agent, there’s no time limit for prosecuting you. Seek advice immediately if you suspect you could face criminal or civil investigations for tax fraud.
Statute of Limitations for IRS Tax Refunds
If you’re due a tax refund, you normally only have 3 years from the filing date to claim the credit. In some cases, this is shortened to 2 years.
Statute of Limitations on IRS Debt
Normally, the IRS has 10 years from the tax assessment date to collect the tax and accruing interest. The clock may be suspended – or extended – if, for example, there’s a payment plan or offer in compromise in place.
When Does the IRS Statute of Limitations Begin and End?
It all depends on the legal issue at hand.
As an example, for tax debt, the clock starts running the date the IRS assesses your return – not the filing date. However, the clock for assessing tax doesn’t start until 3 years after the return was due.
It’s crucial that you consult our tax experts for more advice on which IRS statute of limitations applies. Otherwise, you may be surprised to learn that the IRS is still within time to pursue a debt!
Knowing whether an IRS claim is “time-barred” can help you avoid paying old tax debts if you’re struggling financially. Consult Innovative Tax Relief now for a free tax consultation.
Tolling Events — Events That Pause the Clock on the Statute of Limitations
Under certain circumstances, the statute of limitations can be tolled. This means that the running of the period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.
However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t shorten it.
Examples of tolling events are:
Filing for Bankruptcy
According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.
Requesting an Offer in Compromise
This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.
Lack of Legal Capacity
It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.
Unconditional Promise to Pay
Either a liability acknowledgment or an unconditional promise to pay the due liability may toll the statute of limitations for obligation or liability. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the liability. The period of limitations will begin again upon that due date.
Cause of Action Has Been Concealed (Fraudulently)
In this case, the statute is suspended until the action is discovered via the exercise of due diligence.
Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.
How to Use the Statute of Limitations to Your Advantage
Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.
Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000.
But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax liability is now $70k–more than you even made that year!
So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax liability reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.
The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.
You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.
Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax liability and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.
