Statute of Limitation Basics

Generally, a statute of limitations is a law that limits the time a legal proceeding, or act allowed under a law, can be initiated.  Think of it as a way of legal housecleaning – if you wait too long to bring an action or pursue a matter, the slate will be wiped clean and you can no longer pursue it, even if you would have won the action.  The Internal Revenue Code has a number of different statutes of limitations that apply to different situations.

With regard to refunds of prior taxes paid, generally you have three years to file an amended return and request a refund.  This three year period starts on the date of the original deadline of the return.  Alternatively, you have two years from the date the tax was actually paid to claim a refund.  Which date controls?  The later of the two.  Say your tax return is due April 15, 2014.  Add three years and you have until April 15, 2017 to file for a refund on overpaid taxes on your 2013 return you filed on April 15, 2014.  The right to file for a refund expires after April 17, 2017. If you filed an extension then the three years is calculated from the extension date.

As for the dreaded tax audit, generally, the IRS has a right to audit your tax return for three years after the date in which you actually filed the return.  But there are exceptions to this rule.  The IRS has six years if you omitted more than 25% of income on the return.  They also have six years if there is more than $5,000 of omitted income relating to foreign financial assets and accounts.  And if you file a false or fraudulent return there is no statue of limitations.  The right to audit on those returns remains open indefinitely.

When it comes to collecting taxes, the IRS has 10 years to collect.  The clock starts to tick at the time the tax liability is finalized.  A tax is considered finalized when the IRS has decided the liability is not subject to adjustment because of an audit or dispute with the taxpayer.  This ten-year countdown can be suspended while the IRS is reviewing various offers to settle the tax liability (such as offers in compromise, installment agreement proposals, requests for innocent spouse relief and collection hearings).  It’s also suspended if the taxpayer is in a bankruptcy protection proceeding.  Finally, it does not run when the taxpayer resides outside of the United States for at least six months.

If you are in a situation where you need to assess whether the IRS still has the right to audit your tax returns or collect taxes from you, or you feel you overpaid and want to file a refund, and you don’t know if the statue of limitations has run out on your matter then schedule your free consultation by calling (480) 888-7111 or submit a web request here.