Ultimate Guide to the IRS Statute of Limitations

Everything you need to know about the IRS statute of limitations.

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All good things must come to an end — but luckily, all bad things end, too. Even the Internal Revenue Service has limits on how much time it can legally spend collecting on federal income taxes. This time period is called the IRS statute of limitations, and understanding these limits can save you money in the long run.

What is the IRS statute of limitations?

It’s your responsibility to report your income and pay your taxes by filing an annual tax return. In turn, the IRS has a responsibility to audit these tax returns and confirm that everyone is paying their fair share. However, the authority of the IRS is not without limits. Congress dictates that the IRS must conduct its reviews in accordance with the applicable statute of limitations. That means that they can only audit taxpayers or pursue unpaid tax debt within a set period of time. After the period ends, any unfinished case is thrown out.

The IRS must assess your tax return within three years (six years if you fail to report 25%) of the due date of the return. However, the IRS does have a maximum 10-year period to collect from taxpayers after assessing your taxes.

The time limit on the IRS’ pursuit of taxes is typically three years, though it can last longer if the statute of limitations is suspended. Suspensions occur when the IRS is temporarily barred from collecting — for example, after you file for bankruptcy.

Why are there limits?

One of the purposes of the statute of limitations is to prevent bottlenecks in the court system over claims that are too nebulous to pursue. Over time, paper trails go cold and witnesses become hard to track down, making it increasingly expensive for the IRS to investigate. More importantly, the statute provides necessary relief for the taxpayer. If the IRS fails to make its case, taxpayers have the right to get on with their lives in a timely matter.

Two types of statute of limitations apply to taxes. The first is the period wherein the IRS can assess insufficient tax payment by the taxpayer. The second is the period wherein the taxpayer can claim a refund. In both scenarios, there are numerous conditions and exceptions complicating the rules, so it’s difficult for taxpayers to understand how to leverage the statute of limitations to their advantage.

What limits apply to the IRS statute of limitations?

The standard time limit for the IRS to conduct an audit is three years, but it jumps to six if you fail to report 25% or more of your income. Only the most serious tax violations have no statute of limitations. In cases of civil tax fraud, the IRS can investigate as far back as it deems necessary.

Generally, the IRS’ assessment must be made within three years of the due date of the return or the date you actually filed it, whichever is later. So if you delay filing your 2018 tax returns until July 15, 2019, then the IRS has until July 15, 2022, to assess any potential issues. However, the IRS does have a maximum 10-year period to collect from taxpayers after assessing their taxes.

What limits apply to the taxpayer’s statute of limitations?

Not all statute of limitations benefit the taxpayer. There is also a limit to the period wherein a taxpayer can file for a refund or credit. So if you miss this deadline, then by law the IRS cannot issue you a refund.

If you wish to claim a refund, you must do so within three years from the filing date, or two years from the date you actually paid the tax — whichever is later.

If your employer withholds too much tax from your paycheck, the date of your last paycheck for the year also represents the last date you overpaid on your taxes. Assuming you file your tax return on time, you must claim your refund within three years of your filing date. But if for some reason you don’t file your tax return, you must collect on your refund within two years of the date you last overpaid. By the time you realize you actually have a refund coming, you’ve lost over a full year to collect.

What is an extension?

Both the IRS and the taxpayer can request to extend the statute of limitations. When taxpayers file for an extension, they’re requesting more time to file their return. Typically, the IRS grants an additional six months from the original filing date.

But sometimes the IRS needs more time, too. If you are being audited, the IRS may ask you to sign a form that extends their statute of limitations, giving them more time to investigate your case. In most cases, it’s in your best interest to agree to the extension. Turning down the request could invite additional scrutiny. If they do request an extension, this may also be a good time to seek the advice of a tax professional who can review your specific circumstances.

Does amending my return affect the statute of limitations?

Need to correct information that will alter the tax calculations on your return? You can file an amended return within three years of the original filing date. However, note that the IRS’ statute of limitations will restart on the date of your amended return. The IRS will still have the full three years to review your return.

SuperMoney Tip: Consult with a tax relief expert before taking a step that would extend the statute of limitations on your case.

The bottom line

Like anything tax-related, it pays to keep meticulous records. It also pays to know how far back the IRS can ask you to prove your income, expenses, deductions, and more. But counting down the days until you are clear of an audit is a worst-case scenario. If you file accurately and on time, you’ll have a safe and stress-free tax season, regardless of the statute of limitations.

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