Three Exceptions to the Three-Year Statute of Limitations for Tax Assessments & Refund Claims

Statutes of limitations are provisions of law that require actions to be initiated for prior events within a certain maximum prescribed time period. Therefore, if an action is to be brought or pursued for a prior event, it typically must be initiated before the maximum prescribed time period expires. The purpose of statutes of limitations is to allow for the best evidence that is available to be presented in the pursuit of the action. As time expires, evidence may become lost or unavailable, witnesses may no longer be available, and prosecuting such untimely actions and defending them will become very difficult. Therefore, statutes of limitations are designed to compel action be initiated before evidence becomes unavailable. Failure to initiate such action within this specified maximum prescribed time period is a valid defense and precludes the pursuit of the action.

Statutes of limitations apply for federal income tax matters, as well as other legal matters, civil and criminal. The Internal Revenue Code prescribes specific provisions for when prior tax matters may be pursued by either the IRS or the taxpayer. It depends on whether the IRS is seeking an additional assessment of tax or the taxpayer is seeking a claim for refund. The general rule for imposing additional tax or claiming a refund is three years from the date the tax return is filed or the due date, whichever is later.

As with any rule, there are exceptions.

There are two exceptions from the general rule for IRS assessment of additional tax. The first exception applies to the substantial omission of income. In the case of substantial omission of income, the statute of limitation for the general rule described above is extended to six years. For this exception to apply, substantial omission of income is defined as more than 25% of the gross income is omitted on the tax return. For example, if the taxpayer has $126,000 of gross income and only reports $100,000, then this will trigger the six-year statute of limitation. If the taxpayer had reported $102,000, then the general rule three year statute of limitation would still apply. It is noteworthy to recognize that the six-year statute of limitation applies only to the substantial omission of income and not to other items such as claiming excessive deductions, etc.

The second exception to the general rule for assessments applies to fraud (the willful intent to evade tax) or to tax returns not filed at all. In either of these cases there is no statute of limitations. There is no time limit for the IRS to assess additional tax or initiate a court action. The burden of proof generally remains with the IRS in cases of fraudulent tax returns or tax returns not filed.

The third exception has to do with how long a taxpayer has to claim a refund for the overpayment of tax. A claim for refund must generally be made within three years from the date the tax return was filed or the due date, whichever is later. If no tax return is filed, then the claim for refund must be made within two years from the date the tax was paid. Any tax deducted and withheld from the wages of a taxpayer is treated as paid on April 15. My advice: If you have a refund, then be sure to file within two years of the due date of the return.

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