IRS Statutes of Limitations

The prudent taxpayer will file an accurate and timely return  whether or not the stated tax liabilities are satisfied by payment at the time of filing.   Only by doing so will the taxpayer “trip” the period of limitations for I.R.S. assessment of taxes.

The I.R.S. must assess taxes  relating to a deficiency in income taxes within 3 years of the prescribed filing date. An assessment is nothing more than a formal demand for taxes made by a government having the right and power to collect those taxes. Naturally, the expiration of the 3-year assessment period is a welcome event for the taxpayer who has filed an accurate return and paid his taxes.

To be considered a return for purposes of the filing requirement, the document must disclose all items of income, deductions and credits required to compute the tax. The return need not actually either actually calculate the tax or be accompanied by payment.

If the return is not reasonably “accurate,” the statute of limitations for assessment increases to 6 years.  A return is not “accurate” if it contains a “substantial omission” from gross income. An omission is considered “substantial” if it exceeds 25% of the income required to be reported. However, the Code provides that an omission cannot exist with respect to any item which is disclosed on the return or in an accompanying statement. Thus, an aggressive position taken on a return will not, in and of itself, result in the loss of the 3-year assessment period so long as the position is disclosed.

In two circumstances the I.R.S. is never barred from assessing taxes.  The first is where the taxpayer files no return; the second is where the taxpayer files a fraudulent return. Surprising or not, filing no return is far less damaging than filing a fraudulent one, since a filing omission may later be cured by filing the return and paying the remaining tax, if any. (Of course, the taxpayer may be faced with penalties for failure to file and failure to pay, and perhaps interest penalties.)

Filing a fraudulent return is, however, under the tax law, considered to be a fait accomplis, and a taxpayer who commits this act cannot generally be liberated from tax purgatory. One exception to this rules allows a taxpayer who files a “fraudulent” return to file an amended return before the original return due date. Filing a “truthful” return at later time will not generally curry favor with the I.R.S., which may instead consider the second return an admission of the fraudulent character of the first.  Nor will filing a fraudulent return trip the period of limitations for assessment:  the Code penalizes the taxpayer who files such a return by permitting the I.R.S. to assess taxes relating to that return forever.

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Just as surely as night follows day, demand follows  assessment.  The government’s demand begins politely with the “30-day letter” and escalates to the “90-day letter.” After being notified of a “proposed deficiency” in the 90-day letter, the taxpayer must either file a petition in Tax Court to prevent the assessment, or he must pay the proposed assessment. Filing a Tax Court petition stays I.R.S. collection until that tribunal renders a final decision. If the assessment is paid, the taxpayer may sue the I.R.S. in district or claims court (but not the Tax Court) within 2 years for taxes erroneously or illegally assessed, together with interest thereon. When faced with this choice, most taxpayers opt to keep the wolf away from the door by filing a Tax Court petition.

If the I.R.S. prevails in Tax Court, it will invariably proceed to collect the assessed tax, which now includes interest. Following a formal written demand, a tax lien arises by operation of law on all of the taxpayer’s real and personal property. To facilitate collection, the I.R.S. is empowered to employ summary administrative levy. Unlike other secured creditors, the I.R.S. is not required to “perfect” its lien by obtaining a court judgment before levying on the taxpayer’s property.

The taxpayer who owns no property may be unimpressed with the Service’s summary administrative powers, which last for 6 years. Near the expiration of those 6 years, the Department of Justice may initiate an action to reduce the lien, which is a quasi judgment, to a formal judgment.  Although this action will greatly extend the period of collection, it will not extend the 6-year period for administrative levy.  After that time, the Service, like other judgment creditors, must enlist the courts’ aid in enforcing judgments.

Periods of limitations for assessment and collection, though jurisdictional, may be extended by agreement. Circumstances may justify consent to extend the period of assessment where the Service is evaluating the taxpayer’s return or legal position. Consent to extend the collection period may likewise be warranted where an “offer in compromise” has been submitted by the taxpayer. The Service may predicate its evaluation of the taxpayer’s financial condition — and offer to satisfy the assessment by paying only a fractional part thereof  — upon the taxpayer’s grant of additional time for I.R.S. collection.

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