A look at the Statute of Limitations for Tax Refunds IRS Audits and Collections

A statute of limitations generally is an amount of time within which a certain legal claim can be made. It applies to criminal matters, civil matters, and as we will see below, it also applies to tax matters as well. 

In the tax world, there is a certain statute of limitations prescribed in law for refunds, audits and collections so that there is a certain amount of time beyond which there cannot be a claim, and the parties do not need to be worried indefinitely about a claim surfacing. 

This provides some certainty under the law after a certain amount of time has passed that matters from years earlier will not be brought up for review. Here is a brief overview on the various statute of limitations and due date deadlines that taxpayers need to be aware of concerning tax refunds, audits and collections.

Tax Refunds – The statute of limitations for a tax refund applies to limit the amount of time that a taxpayer has to claim for a refund from the IRS. Generally, a taxpayer must file a claim for refund for a particular tax period within 3 years of filing the tax return or within 2 years of paying the tax, whichever is later.  If no return was filed, the claim for refund must be within 2 years of when the tax was paid. 

Essentially what this means is that you have 3 years from when you file your tax return to claim for a refund from the IRS. Alternatively, you have 2 years from when the tax was paid to claim for a refund, whichever option is later.  The 3 year statute of limitations will usually be later, and practically what this means to you is that if you file a tax return showing a certain amount of tax due, and later you realize that what you filed was incorrect and you are entitled to a refund, you must re-file with the IRS an amended tax return (Form 1040X for individuals) claiming that refund within 3 years of the date you originally filed your return.  This is an important number to know if there is any possibility of filing an amended return claiming a refund.

IRS Audits – Generally, there is a three year limitation period during which income taxes must be assessed after the original income tax return.  This means that once you file you tax return, the IRS generally has 3 years within which to assess additional tax or seek an audit of your tax return.  Once the three year period has expired, they cannot assess any additional tax on that year and that year is considered closed. 

This period can be extended by written agreement of the IRS and the taxpayer.  However, if the return is false or fraudulent or a return is not filed, the IRS may assess for that tax year at any time.  This means that if you file a false return or fail to file a return at all, there is no statute of limitations for that tax year, and the IRS can assess or audit you at any time, even 15 years after the fact.  This is why it is extremely important to always file a return and to be truthful and accurate on your return.

IRS Appeals – The IRS appeals procedure is somewhat tied to the IRS audit procedure and timeline, although there are a few specific timelines that are worth mentioning in our discussion here.  First, as stated above, the IRS must follow the 3 year statute of limitations period for a tax period where the return has been filed.  They may assess additional tax during that time.  Assuming that the IRS is going to seek an assessment, there are two important time periods that every taxpayer should be aware of, both of which start upon the receipt of notices from the IRS.

The first time period to be aware of involves the so called “30-day letter”.  If the IRS is going to seek an assessment, they will first send the taxpayer a 30-day letter.  This letter is a preliminary letter informing the taxpayer of the IRS’ intentions and offers the taxpayer a chance to appeal the determination through the IRS appeals process. 

The IRS appeals process is a complicated topic for another discussion, but it basically involves negotiating with the IRS concerning their proposed adjustments to your tax return.  It is important to note though that upon the receipt of the 30 day letter, you have 30 days from the date of that letter to submit your case to IRS appeals.  After that time period, you lose your right to go to IRS appeals.

The second important time period immediately follows the initial 30 days after the 30 day letter and involves the IRS issuing a “90-day letter” which is their standard statutory notice of deficiency.  This is the IRS’ official notice to the taxpayer of their assessment. 

The taxpayer has 90 days from the date of the 90-day letter to file a petition in Federal Tax Court to argue their case against the IRS. They must file the petition within those 90 days or else the taxpayer will lose that privilege as well, and the tax will be considered generally collectible. It is extremely important to be aware of these two letters and the deadlines involved with the receipt of these letters to make sure your rights are preserved. If you receive either a 30-day or 90-day letter, it is highly recommended that you consult a tax professional immediately so that you do not wait too long and lose some of your rights.

IRS Collections – Once you have an assessment by the IRS, they will try to collect it. The statute of limitations on the collection of an assessment of tax by the IRS is 10 years generally. This means that the IRS has 10 years from the date of the assessment to try and collect the money from you. Additionally, interest will accrue on a deficiency from the date the tax was due, without any extensions, until the date payment is received. This can result in a rather hefty interest charge to go along with the assessment if you are not careful about it.

The statute of limitations concerning your taxes, IRS audits, appeals and collections are all very important to know for every taxpayer. These are some important rules and limitations on how the tax process works and what sorts of limitations there are for yourself and for the IRS. As always, if there is some doubt about whether you are going to run into difficulty with any of these time periods, please consult a tax professional. 

Ignoring the problem or pretending it doesn’t exist will absolutely make it worse, and coming into compliance with the IRS as soon as possible is usually your best option. Keep in mind all of these important time lines if any of these procedures are currently or potentially going to be an issue for you and be a smart taxpayer by knowing your rights.