Statute of Limitations: When Taxpayers Can Tell the IRS, “You Snooze, You Lose.”
The idea of paying taxes and filing tax returns can be unsettling, especially for the many Americans who don’t intimately understand all the rules of the IRS[1] and federal income tax. Rest assured, the IRS’s ability to, for instance, assess additional taxes or collect unpaid taxes is not unfettered; they cannot scrutinize and take action on taxes you filed or failed to pay long ago (absent some exceptions). There are time limitations, called “statutes of limitation” (SOL), for the IRS to take certain actions against a taxpayer, after which you can tell the IRS to take a hike. Specifically, once the SOL period expires, the IRS cannot assess, refund, credit, or collect on federal income taxes. Nor can the IRS take collections action (including initiating a civil or criminal case) after the SOL has passed.[2] For taxpayers, the SOL also restricts the right to claim a refund of overpaid tax or initiate litigation to obtain a refund. In short, SOL time limits provide a date of finality after which actions taken by the IRS or the taxpayer cannot lie.[3] Practically-speaking, you’ll want to keep your and your business’ tax records and supporting documentation[4] in an organized and safe place until you’re confident the applicable SOL has expired[5]. Thus, the good news is you do not have to keep your records forever, and for most of us, you only have to keep these records for 3 years following the date of filing or the due date of your tax return, whichever is later. However, before you start shredding records older than 3 years, be aware of the many conditions that may extend the SOL applicable to your situation, such as whether a return was filed at all, and how accurate or inaccurate a return was.[6]
The following are some general rules of thumb, some of which may be particularly applicable to you or your business:
- As mentioned, the IRS generally has to examine tax returns, assess any additional taxes, make changes, or file suit against the taxpayer within 3 years from the due date of the return or the day you actually filed your return, whichever is later.[7] This 3 year SOL also applies to penalties. So you should retain tax records and documentation for at least 3 years.
- Similarly, for refunds claimed, the SOL expires 3 years from the due date of the return (whether or not you file early). Filing an extension may extend the SOL period for claiming refunds, however.[8]
- If you file an amended return, the SOL is not extended for your original return. In other words, the original date determines the SOL time period (with some exceptions depending on the timing of your amended return).
- If you claim depreciation, amortization, or depletion deductions, it’s best to keep related records (including deeds, titles and cost basis records) for as long as you own the underlying property.
- If you claim special deductions and credits, you may need to keep your records longer. For instance, if you file a claim for a loss from worthless securities or bad debt deduction, you should retain related records for at least seven years.
- If you make nondeductible contributions to a traditional IRA, you should keep your IRA records until you withdraw all money from the account.
- If you own property that will result in a taxable event at sale or disposition (e.g. home, stocks, bonds), you should keep your records affecting certain tax consequences until at least 3 years after the disposition of the property. Be sure to consult a tax professional or lawyer to figure out which tax consequences or what taxable events apply to your property.
- When it comes to collecting unpaid taxes, the IRS generally has 10 years after the date the tax was assessed to collect. If your return is what determined the tax liability, then the collections period runs from the date of the return’s filing. If the tax liability is due to a substitute return filed by the IRS (e.g. because you failed to file), an examination, or changes to your return, the SOL starts from the date of the finalized assessment. If the IRS doesn’t collect within the applicable 10 year period, the IRS cannot take efforts to collect any due taxes.
- IMPORTANT: If the following applies to you, you should immediately contact an experienced tax lawyer to help you understand and explore your options going forward, lest you face potentially large penalties and, even worse, jail time.
- If you significantly understate your income on a tax return (i.e., by more than 25%), the SOL is extended to 6 years.[9] [10] If you don’t report all the income you should, it’s best to keep your tax documentation for at least 6 years.
- There is no SOL time limitation if you: (1) filed a false or fraudulent return, (2) willfully tried to evade tax (e.g. never pay taxes), or (3) failed to file a return. Under these circumstances, taxes could be assessed and/or collected at any time. If either of these is true for you, you should retain your tax records until you're otherwise advised by a tax lawyer. Not only will there be no time limit on IRS action against such taxpayers, but heightened interest fees and penalties will apply.
Note that the above SOL time periods are subject to exceptions and special circumstances that may extend or remove the time limitation all together. A knowledgeable tax lawyer should be consulted to consider the various factors and determine which SOL time period applies to you and/or your business.
For the majority, taxpayers can rest assured that reasonable statutes of limitations time periods do exist; and once expired, if the IRS comes knocking, we can comfortably tell the IRS: “you snooze, you lose; take a hike” (after consulting a tax lawyer, or course).
— By Keobopha Keopong Esq., Barnes Law
Keo Keopong is an associate attorney with Barnes Law, and is licensed to practice law in California.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Internal Revenue Service.
[2] “Chapter 6. Statute of Limitations”, Internal Revenue Manual: https://www.irs.gov/irm/part25/irm_25-006-001r.html.
[3] Note that the determination of the SOL expiration differs for assessments, refunds, can collections.
[4] Such documentation include, e.g., W-2 & 1099 forms, bills, credit card & bank statements, receipts, invoices, mileage logs, checks (canceled, substitute, & imaged), and more.
[5] Since 1997, the IRS has accepted scanned receipts, as long as the electronic records are accurate reproductions of the originals; in other words, you can readily produce hard copies of those electronic records. Rev. Proc. 97–22.
[6] See, e.g., 25.6.1.6.4 (09-12-2014), Statute of Limitations Chart for Tax Returns. “Chapter 6. Statute of Limitations”, Internal Revenue Manual: https://www.irs.gov/irm/part25/irm_25-006-001r.html.
[8] IRC section 6511(b)(2)(A).
[10] The statute of limitations is extended to six years when the taxpayer omits gross income in an amount exceeding 25% of gross income actually reported on the income tax return. Items of gross income are determined under IRC section 61.