IRS Statute of Limitations for Income Tax
The Internal Revenue Service, the body designated to oversee the administration of tax laws in the United States, collects revenues on behalf of the Department of Treasury. The IRS is known for requiring submissions of annual income tax returns and is responsible for encouraging compliance with tax laws. Compliance is accomplished by selecting returns to undergo a detailed review, or audit, of information provided on a return. However, the IRS is limited to the amount of time available to select a return for audit.
According to the IRS, the role of the entity is to help the large majority of compliant taxpayers with the tax law while ensuring that the minority who are unwilling to comply pay a fair share. Income tax audits aid in compliance and the collection of revenues. In fact, the Federal Tax Handbook notes that the IRS audits approximately 1 percent of all individual income returns filed. The statute of limitations controls the amount of time the IRS has to assess tax and limits the taxpayer’s time to file a claim for an income tax refund.
Generally, all taxes must be assessed within three years after the date the return was filed. However, the length of time is extended to six yeas for taxpayers that fail to report more than 25 percent of total income. Furthermore, the statue of limitations is extended indefinitely for years when a taxpayer failed to file a required return, filed a fraudulent return or attempted in any way to evade tax. Also, a taxpayer has three years to request a refund of overpaid taxes. However, a taxpayer who claims the IRS cannot assess additional tax because of the expiration of the statute of limitations must raise the issue and prove tax can no longer be assessed.
The statute of limitations helps taxpayers determine the minimum length of time to store records used to prepare annual income tax returns. A taxpayer generally needs to keep records, such as 1099 interest and dividend reports and receipts to support deductions, for at least three years. Failure to produce these documents during an audit or claim for refund, increases the chance the taxpayer may have an additional income tax liability.
The statute of limitations is extended when the taxpayer and the IRS agree in writing to extend the assessment period. A taxpayer may want to extend the assessment period to include additional deductions on a previously filed income tax return. To consent to extend the limitation period the taxpayer files Form 872 any time before the expiration of the assessment period.
The IRS may impose interest and penalties on tax assessed during the limitations period. A taxpayer assessed additional taxes for a prior year return is required to pay the tax liability in addition to interest and penalties imposed from the original due date of the return. Also, failure to report income earned illegally, indefinitely extends the statute of limitations.
- IRS.gov: The Agency, its Mission and Statutory Authority
- RIA Federal Tax Handbook 2010; Thomson Reuters; 2009
Kendra James has written business-related articles since 2001. Her work has appeared in eHow and the "Montgomery Advertiser," as well as being utilized by regional accounting firms in Florida and Alabama. James is a certified public accountant. She holds a Masters of Science in accountancy from the University of Central Florida.