All good things must come to an end — but luckily, some 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 may 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 response, 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. This means that they can only audit taxpayers or pursue unpaid tax debt for 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 your gross income) of the due date of the return. However, the IRS does have a maximum 10-year period to collect tax debt from taxpayers after an audit.
The time limit on their 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 manner.
What statute of limitations does the IRS have to follow?
|3 years||General Rule||IRS has 3 years to assess taxes form the date the return was filed.|
|6 years||Six-Year Statute||If you omit 25% or more of your gross income on your return.|
|No limit||Indefinite Statute||If you file a fraudulent return or don’t file a tax return.|
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 statute of limitations does the IRS and the taxpayer have to follow?
Two types of statutes of limitations apply to taxes. The first is the period wherein the IRS can assess insufficient tax payments by the taxpayer. In other words, the taxpayer owes the IRS taxes that they did not pay. The second type of statute of limitation 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. Below is a short summary to begin understanding the limits that may apply to you:
You Usually Have 3 Years to Claim a Tax Refund
With a few exceptions, you have three years from the date of the original tax return deadline to request any refund that you might be entitled to. For example, if your 2021 tax return is due on April 15, 2022, you have until April 15, 2025, to file your 2021 tax return and still get any tax refund that’s due to you. This timeframe could be bumped back, though, if you were late in your payment of taxes initially. If you have not filed your taxes and have questions, it’s time to review.
This timeframe can be extended to up to seven years for taxpayers who need to claim a refund resulting from deductions for bad debt or worthless securities. And finally, this timeframe doesn’t apply in situations where taxpayers are unable to manage their financial affairs due to physical or mental impairments.
The IRS Has 3 Years to Audit Your Federal Tax Return
On the date that taxes are due (generally April 15), the clock starts ticking on how long the IRS can initiate an audit of your tax return. This means that, in most cases, if you file your 2021 tax return on February 15, 2021, the IRS has until April 15, 2024, to begin an audit on your return.
As with most things, there are exceptions to this rule if the taxpayer omits income that amounts to more than 25% of that which was reported on the tax return or has undisclosed foreign financial assets if the omitted income is more than $5,000.
If you request an extension of time to file your tax return, then the IRS would have three years from the date you actually file. If you file in July, for example, the three-year statute of limitations clock begins ticking in July. If you do get audited and disagree with the results, learn more about what steps to take here.
Many state agencies follow the 3-year statute of limitations rule but check with your individual state if you have questions about when you can expect them to be able to audit your state tax return.
In these exceptional cases, the IRS can pursue an audit for up to 6 years.
The statute of limitations on audits and assessing additional tax can remain open indefinitely if the taxpayer files a false or fraudulent tax return.
The IRS Has 10 Years to Collect Your Outstanding Debts
You can only owe money to the IRS for so long before they take action. IRS Letter 1058 is the final step in the process of levying your wages and/or seizing your property. If you ignore this letter and their requests to collect tax debt, it’s important to remember that they have 10 years to work on getting their money from you!
The 10-year deadline for collecting outstanding debt is measured from the day a tax liability has been finalized, which can happen through a number of scenarios-
- Your liability might be considered finalized because it’s the amount of tax reported on a tax return that you’ve filed.
- Your liability might be considered finalized because it’s an assessment of additional tax from an audit.
- Your liability might be considered finalized because it’s a proposed assessment that has become final.
The IRS has 10 years to collect the full amount from the day a tax liability is finalized, plus any penalties and interest. If the IRS doesn’t collect the full amount within the 10-year statute of limitations period because the statute of limitations has expired, the remaining balance may disappear forever.
The 10-year statute of limitations on collections can be temporarily stopped for the following reasons:
- The IRS is reviewing an offer in compromise, installment agreement, or a request for innocent spouse relief.
- A taxpayer is under the automatic stay period of bankruptcy protection plus an additional six months.
- The taxpayer resides outside the United States for at least six months.
This suspension means that the clock stops running during these times. For example, the IRS might take two months to evaluate your request for an installment agreement to pay a tax debt you owe. In this scenario, the 10-year statute of limitations would be pushed back for two months or 60 days. Review https://www.supermoney.com/irs-collections/ to learn more about the IRS collection process.
What limits apply to the IRS statute of limitations?
As mentioned in the summary above, 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 2019 tax returns until July 15, 2020, then the IRS has until July 15, 2023, 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?
Some limitations are for the benefit of the IRS, namely the limit to the period when 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 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. For example, the normal filing deadline is April 15, but if a taxpayer files for an extension, they are often given a new deadline of October 15.
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 could 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.
Want help keeping your tax forms error-free to avoid triggering an audit? These tax preparation firms can help. Or, if you’re facing an audit and you need an expert on your side, click here to compare leading tax relief firms.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.