Does the Statute of Limitations Apply to the IRS?

Most people have heard the term “statute of limitations” in reference to general law. In the criminal justice system, there are statutes of limitations that govern how long the state has to prosecute for an offense.

If the legal process does not occur within this predetermined window of opportunity, a suspect cannot be prosecuted, even if there is proof later that they are guilty. This does not apply to certain serious criminal offenses (like murder), but it usually applies to tax law. Here’s what you need to know about the statute of limitations within the U.S. tax system.

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline

It’s usually three years

The statute of limitations for IRS audits of tax returns is usually three years from the filing due date, unless you file late, in which case it runs from the date you filed. Even if you file early, the IRS has 10 years from the date a tax was assessed to collect the taxes. If a return was filed late, the statute does not begin running until that return if filed and the taxes are assessed against you. That date is not set in stone either – there are certain instances that can stop it from running.  Anything on your account that prevents the IRS from collecting from you (bankruptcy, offer in compromise, pending installment agreement, etc.) stops the CSED and therefore extends it past the 10 years.

There is an exception

In cases where there has been a significant understatement of earnings (which the IRS defines as 25 percent or more of your earnings), it has six years from the due date for filing (or late filing date), to audit you. This also applies to scenarios where you understate profits. This could be, for example, after the sale of a property that has significantly appreciated in value while it was in your possession.

Or it might never expire

The first two scenarios, relating to the statute of limitations on U.S. tax audits, usually cover simple, uncomplicated taxes. Most ordinary people will fall into one of these two categories, but there are a few instances where the IRS may be able to audit for an indefinite period. Those include:

  • You did not properly account for foreign income, gifts or inheritances. If you don’t file the appropriate forms to declare this income, the statute of limitations never begins, and therefore never expires.
  • The same applies when you are the owner or part owner of a foreign corporation. In this case, you are required to file Form 5471, even if the corporation has not earned any money. If you fail to file, the IRS can audit you indefinitely, and your entire tax return will be open to scrutiny.
  • If you don’t file at all (or you file a fraudulent return), the IRS has no limitation on the time it has to pursue you.

A two-way street

The statute of limitations doesn’t only apply to the IRS. There are limitations on the time during which individuals can take certain actions too.

You have three years from the date of filing (or due date if you filed early) to amend a tax return, and to claim any refunds that may be due to you. If you don’t claim your money during that time, you forfeit it.

Extensions and other notes

In some cases, the IRS may decide that it wants to audit your taxes, but it doesn’t have enough time to do so. In those cases, it may send you a letter requesting an extension of time. If you have received that letter or a notice that you are being audited, contact our office for expert legal advice on what you should do next.