Statue of Limitations
The statute of limitations is the period within which an action may be taken by the IRS on a tax return. After the statute of limitations has run out on a given tax return, the government cannot assess additional taxes, and the taxpayer cannot amend the return to request a refund. In general, statute of limitations for a return runs for 3 years from the date the return was filed or return due date, whichever is later.
Statute of Limitations Exceptions
The tax law contains exceptions to the 3-year statute of limitations:
- If a fraudulent tax return is filed or no return is filed, there is no statute of limitations. The IRS may assess a tax deficiency at any time in the future.
- If a taxpayer omits an amount of gross income in excess of 25% of the gross income shown on the return, the statute of limitations is increased to 6 years. For example, if a return with gross income of $40,000 contains an omission of over $10,000 of gross income, statute is increased to 6 years.
- Statute of limitations for deduction of a bad debt or worthless securities is 7 years. This limitation applies only to the bad debt deduction or worthless security deduction; all other items on the return would normally close out after 3 years.
Besides these exceptions, the statute of limitations may be extended by mutual consent of IRS and taxpayer. This extension is for a specific time period and is made by signing the appropriate form in the Form 872 series. An extension is generally used when the statute is about to lapse and an audit has not been completed. If a tax deficiency has been assessed within the statute period, the government has 10 years from date of assessment to collect tax due.
An IRS study shows taxpayers lose refunds because they fail to file their returns within the statute of limitations for claiming a refund, which can be 2 or 3 years depending on circumstances. The IRS denies millions of dollars in refunds each year that were claimed in delinquent returns.