Statutes of Limitations – Taxpayer’s rights
Statutes of Limitations – Taxpayer’s rights
Two perspectives-
From the government’s perspective, the statute of limitations restricts the taxpayer’s rights follows:
- Claim a refund of overpaid tax
- Initiate action to obtain a refund
From the taxpayer’s perspective, the statute of limitations restricts the IRS’s rights as follows:
- From collecting a deficiency in tax
- Asserting a civil or criminal case
In either case, the statute of limitations provides a date of finality after which actions may not be taken either the IRS or the taxpayer.
Three-year Statute of Limitations
General rule-
- The IRS must assess tax within three years after the return has been filed- this three year period also applies to penalties
Timely mailing of a return
A return is treated as being filed timely even if the return is received by the IRS after the return’s due date
- Timely filing is determined by the postmark stamped on the envelope by the U.S. Postal Service, this includes mail sent via a ‘private’ delivery services
- A good rule of thumb is to send all returns and other important documents to the IRS via registered or certified mail, return receipt requested.
Designated Private Delivery Services Include:
- Airborne Express
- DHL
- Federal Express
- Overnight Air Express Service
- Next Afternoon Service
- Second-day Service
- United Parcel Service
A good rule of thumb is to send all returns and other important documents to the IRS via registered or certified mail, return receipt requested.
Is There a ‘Bright Line’ Test for Assessment Purposes?
There does not appear to be a ‘bright line’ test to determine whether a Form 1040 lacking a required form is a valid return. Courts typically apply the substantial compliance standard to the facts of each case:
- There must be adequate information to calculate the tax liability
- The document must indicate that it is a tax return
- An honest and reasonable attempt must be made to satisfy the tax law
- The taxpayer must execute the return under penalties of perjury
Based upon the above guidance, a complete return that lacks a required form is still sufficient to begin the statute of limitations for assessment purposes
Special statute of limitations rules
- A substitute for a return (SFR) prepared by the IRS for the taxpayer does not start the running of the statute of limitations for assessment.
- A taxpayer for whom a (SFR) was prepared can start the running of the three-year statute of limitations on assessment by filing a correct tax return.
Six-year Statute of Limitations
- A six-year statute of limitations on assessment applies to returns that omit a substantial amount of gross income- an amount which exceeds 25% of gross income reported on the tax return
- The limitations period is extended to the taxpayer’s entire tax liability for the year, not just the omitted items
- Applies only to innocent or negligent omissions of gross income
- The six-year limitations period does not apply to fraudulent omissions of gross income- these types of ommissions may be assessed at any time.
- The burden of proof rests with the IRS on proving the 25% omission from income- the IRS cannot solely rely on the amount of unreported income asserted in the Notice of Deficiency
No Statute of Limitations
The Internal Revenue Code states that the IRS can assess tax or bring a suit to collect an unassessed tax at any time in specific situations
The following lists those instances which are most:
- The taxpayer does not file a tax return
- A false or fraudulent return is filed with the intent to evade the tax
- The taxpayer attempts to defeat or evade the tax
- Once the taxpayer files a fraudulent return, the taxpayer cannot later start the running of the three-year statute of limitations period by filing an amended return to include the omitted income
Statute of Limitations on Collection
- The IRS has 10 years to collect assessed tax
- The 10-year period is similar to the three-year period the IRS has to assess the tax- there are certain events that can extend the statutory period past the 10-year period
Reasons for extending the statute of limitations on the collections period include:
- Bankruptcy
- Collection Due Process Appeal Requests (Form 12153)
- Litigation
- Offers In Compromise
- Pending Installment Agreements
- Military Deferment
- Innocent Spouse Defense
The Date of Assessment
- This is the date the Assessment Officer signs the summary record of assessment.
- This information can be verified by obtaining a transcript of the taxpayer’s Record of Account
- Certain penalties have a different assessment date from that of the original tax assessment- in those instances the penalty has a separate collection statute expiration date.
The IRS can use Administrative or Judicial Methods to Collect Delinquent Taxes
- The IRS can proceed administratively by levying and seizing assets owned by the delinquent taxpayer
- If the IRS embarks upon this course of action, the levy must occur within the 10-year statute of limitations period.
- The IRS can also proceed judicially by filing a lawsuit against the taxpayer within the 10-year limitation period.
When is the Statute of Limitations on Collections Suspended for an Installment Agreement?
-During the period of time (pendency) which the Installment Agreement is pending with the IRS
-30 days following the rejection of a proposed installment agreement
-30 days following the termination of an installment agreement
When is the Statute of Limitations on Collections Suspended for an Offer In Compromise?
-During the period time (pendency) which the Offer In Compromise is pending with the IRS
-30 days following the rejection of an OIC
-Any period when a timely filed appeal from the rejection is being considered by the Appeals Office
When is the Statute of Limitations on Collections Suspended for Bankruptcy ?
- A bankruptcy petition prohibits the IRS from assessing or collecting a claim from the taxpayer which arose prior to the bankruptcy petition being filed
- During the pendency period, the assessment limitations period is suspended, plus a period of 60 days after the bankruptcy has been discharged.
- The limitations period for collection is suspended during pendency, plus a period of six months after the bankruptcy has been discharged.
What is the Authority for Appeals Officers to Resolve the Tax Issue?
- Their Settlement authority is very broad
- The primary focus of the Appeals Officer’s job is to resolve the tax issue expeditiously and to weigh the costs of litigation
- Since the Appeals process relies upon negotiation, a high percentage of cases are resolved.
Collection Appeals Program
The IRS Collection Appeals Program (CAP) program facilitates a broad range of appeals issues- they include appeals levies, installment agreements and liens.
- There are no rights to appeal an appellate decision if the taxpayer client does not like Appeals’ decision
- Appeals Officer’s decision is also binding to the IRS.
- To enter a CAP, the practitioner must first request a conference with the appropriate Collection Manager.
- If that conference does not resolve the problem, then Form 9423 (Collection Appeal Request) must be filed within two days of the Collection Manager conference.
- As part of the filing, the practitioner or client must propose a viable solution to the collection problem
- Failure to file Form 9423 within the two-day window permits the IRS to resume collection activity
Assessments
- The first step in the collection process is for the IRS to make an assessment against a taxpayer- until this occurs, the IRS cannot act to collect the tax.
- An assessment is simply what the IRS claims the taxpayer owes
Summary Assessment and Deficiency Assessment
- The most common forms of assessment are summary assessment and deficiency assessment.
- A summary assessment usually represents the amount reflected on a tax return filed by the taxpayer.
- A deficiency assessment can occur due to an adjustment being made to a filed tax return as a result of an audit or a tax return (SFR) being filed by the IRS for the taxpayer who has not filed a tax return.
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