Statute Of Limitations For Tax Penalties and Refunds

The statute of limitations is a law that limits the amount of time after an actionable event for any party from bringing suit over the event. The purpose of the law is to prevent stale claims, when witnesses may be difficult to locate or evidence may have been lost or destroyed. Both state and federal laws have statutes of limitations for most offenses. Only the most serious offenses generally have no statute of limitations.

Under federal law, there are 2 types of statutes of limitations that apply to taxes: assessment of tax deficiencies by the IRS and the duration when the taxpayer can claim a refund.

Generally, an assessment by the IRS must be within 3 years of the later of the due date of the income tax return or when it was filed. So if the taxpayer filed a return on May 1, 2020, then the IRS has until at least May 1, 2023 to assess any additional taxes.

However, if the tax liability is more than 25% of the gross income reported on the return, then the statutory limitations is 6 years. However, the 6-year statute of limitations does not apply if the underpayment of tax was due to the overstatement of deductions or credits.

There is no statute of limitations on a fraudulent return or if no return is filed. There is also no statute of limitations for an employer who fails to turn over trust funds for payroll taxes collected from employees.

The statute of limitations may be extended to 7 years for certain bad debts or securities, since it is difficult to sometimes determine when a debt or security becomes worthless.

The statue limitations may be extended by mutual consent of the director and the taxpayer for a definite period by signing Form 872, Consent To Extend the Time to Assess Tax. This often applies to corporations. Although taxpayers may refuse to consent to the extension, the IRS may retaliate by assessing additional penalties.

The statute of limitations is suspended if the IRS issues a statutory notice of deficiency to a taxpayer, who then files a Tax Court petition, in which case, the statutory period is suspended until 60 days after the decision of the Tax Court becomes final. The statute of limitations may also be suspended when a taxpayer is financially disabled by a physical or mental impairment that is likely to last at least 1 year unless there is someone else who is authorized to act for the taxpayer in financial matters.

Statute of Limitations for Tax Refunds

The statute of limitations for claims of refunds is the later of 3 years from the due date of the return or within 2 years after the taxes are paid.

To claim a refund, taxpayers are required to file a valid refund claim by filing Form 1040X, Amended U.S. Individual Income Tax Return for individuals or, if the taxpayer is a corporation, Form 1120X, Amended U.S. Corporation Income Tax Return. To qualify for a refund, a separate claim must be filed for each taxable period, and the grounds for the claim must be stated in sufficient detail to permit the IRS to evaluate the merits of the claim; otherwise, the IRS may reject it.