Have you heard the expression: "the statute of limitations has expired"?
We all think we know the definition, but how does it apply to IRS regulations? First of all, the term "Statute of Limitations"means there is a time limit where some sort of IRS enforcement action can be brought against a taxpayer who owes an income tax debt.
In the case of a tax return being filed, generally there is a three-year statute of limitations wherein the IRS can audit your return. This time begins with the date the return was filed.
If your income tax return was on extension, the statute of limitation would begin on the appropriate date when received by the IRS.
Under the same set of IRS regulations, unless your income tax is assessed within the three-year time frame, collections cannot be instituted by the IRS.
What happens if you never filed an income tax return even though it was due?
The IRS would prepare what is known as a Substitute for Return (SFR) and there is no statute to consider as this is not a taxpayer-filed return.
Everyone makes mistakes and the IRS is no exception. The amount charged should be checked for accuracy before acceptance of the liability.
Obviously the IRS wants to collect these funds and will exhaust all possible means to secure the money before the tax deadline. They may use all legal means to enforce collection, including IRS levy / garnishment of wages and levying financial accounts and other assets such as bank accounts.
In the event the taxpayer then files a return for that year, the IRS will process it as an original return, restore the correct tax and reset the statute from that day forward.
As can be expected, penalties and interest will begin to be assessed beginning with the original date the return should have been filed.
IRS penalties can consist of late filing, late paying of the tax, nonpayment of estimated tax and perhaps an accuracy-related or negligence penalty.
In addition, this will allow the three-year audit window to be extended to verify deductions in the event it was to be questioned.
In the event of a substantial omission of more than 25 percent of gross income on the return, the statute is extended to six years.
The IRS penalties that result from this type of omission include the others named above, but may include a fraud penalty instead of the negligence penalty, which can be as high as 70 percent of the tax.
On the other side of the coin, a taxpayer has the right to file a claim for refund within the same three-year period beginning with the filing date.
The regulations also state that the taxpayer has the right to file a claim within seven years if the tax refund would be a result of either a bad debt or a loss suffered from a worthless security.
The 10-year collection statute can be extended based on filing an offer in compromise or by filing for bankruptcy.
The statute is put on hold and is not running for an additional six months following the discharge or dismissal of the bankruptcy.
The filing of an appeal against the IRS or the offer in compromise also stops the running of the time period until those issues are resolved and prevents the IRS from pursuing any collection activity, even though the tax is still pending.
The interest, however, will continue to run and be added to the corrected tax amount upon settlement of these two plans.
The IRS will not notify you once the debt has expired.