Both Taxpayers and the IRS are bound by certain time limits within which various tax-related actions must be taken within tax statute of limitations. Collectively these laws are known as the Statute of Limitations. If the time allotted runs out, or the Statute of Limitations expires, the parties lose their right to collect money owed to them: the taxpayers lose their right to claim a refund, and the IRS loses its right to collect taxes owed.
CLAIMING A REFUND
Generally the Taxpayer must file a refund claim within three (3) years of the original due date of the tax return or, if a request for an extension was filed in a timely fashion, within three years of the extended deadline. The 3 year time limit also applies to the filing of amended returns claiming additional refunds. Once the period expires, any refund to which the taxpayer may have been entitled is entirely lost – taxpayers will not see any money, nor will they be able to apply the refund to tax liabilities incurred in other years.
ASSESSING A TAX
The IRS has 3 years from when a return is filed to assess tax a tax liability. The three years does not begin to run until filing of the return, therefore if no return has been filed, there is no statute of limitations for assessing and collecting any outstanding balance.
COLLECTING A TAX LIABILITY
The IRS has 10 years from the date of assessment to collect tax liabilities generated by a tax return to be within the Tax Statute of Limitations. If the 10 year window has closed, a taxpayer may be entirely relieved of their tax liability. However, there are many exceptions to the 10-year rule that extend, or suspend, the running of the clock. The most common events that trigger such extension include:
- Filing an Offer in Compromise
- Filing Certain Appeals
- Filing Bankruptcy
- Filing a Lawsuit Against the IRS
Because of the important implications of various Statute of Limitations issues, whether it is relief from a liability or loss of the right to claim a refund, a consultation with an experienced tax professional can be very beneficial to the Taxpayer. During a consultation, the tax professional can help determine if a Statute of Limitations issue has arisen, and, if so, ensure that the taxpayer properly asserts his or her rights.