How Tax Law is like the Bermuda Triangle

Many stories speak of the mysterious disappearances of ships and planes traveling through the Bermuda Triangle.  There are many theories to where these missing vessels have gone but no one has definitive proof.  A tax refund or liability can disappear just as quickly, but unlike the geographical mystery I can tell when they will disappear.

Just like you the IRS has a limited amount of time to mess with a tax return.  This period of time is known as a statute of limitations.  A statue of limitations is a law that sets a maximum time for a party to enforce their rights.  In the world of taxation, both you and the IRS are bound by the rules of U.S. Code: Title 26 –of The Internal Revenue Code.  This code sets forth many different statutes of limitations.  When dealing with the IRS, it is important to know if there are statutes involved in your situation.

The most common concerns the public haswith their tax return revolves around their refund and the potential of an audit.  The statute to claim a refund is 3 years from the time the original return or 2 years from the time the tax was paid, whichever is later.  Similarly, the IRS has 3 years after the return was considered filed.  When does the IRS consider your return to be filed?  If you filed early, then your return is considered filed on the due date.  If you filed late, then it is the date the IRS received your return; of course in regards to assessment the statute can be extended.  There are three ways the assessment statue can be extended.  Firstly, Substantial omission of gross income in excess of 25% reported on the tax return will extend the statute to 6 years.  Secondly, the taxpayer and the IRS can enter into an agreement to extend the statute of limitations.  Lastly, if the taxpayer filed a false or fraudulent return with the intent to evade tax the statute of limitations flies out the window.  Once the IRS has an assessment of they have 10 years to collect the tax, this is the statute of limitations on collection.  This time period can be extend in a number of ways.  Of course, like the assessment statute, the taxpayer and IRS and agree to extend it mutually.  Certain actions will stop the clock of collections, filing bankruptcy or submitting an offer in compromise for example.

One other important note to take away from this, if there is no filed return there is no assessment date to start the clock of the statute. This does not prevent the IRS from starting collection action on the taxpayer.  The SFR or Substitute For Return is a way for the IRS to begin collecting on a tax year that has not been filed.  This return uses reported information, estimates and the least advantageous filing status to come up with a tax amount to collect.  The SFR is not considered a filed return and does not begin the statute for assessment or collections.

Recognize the value of your timely filed returns.  Even if the liability seems great now, a statute that has run its course is a valuable event to the taxpayer.

-David Hilliard, EA