IRS Statutes of Limitations
By Gary Bluestein
There is no greater pitfall for a practitioner than missing an applicable statute of limitations for a client. Professional judgment can usually be defended. The style and content of a submission are subjective. But a statute of limitations is a bright line for all to see and each practitioner should always be aware of where those lines are. This is true even when the statute of limitations applies to the IRS and not the taxpayer. Knowing when the Service is “out of time” to assess and/or collect can save your clients hundreds of thousands of dollars and it doesn’t matter if the tax is “really owed.”
Statutes of limitations exist for the protection of both the government and the taxpayer. This article will focus on the most common statutes of limitations that affect every tax practitioner at some point during his/her practice.
Statute of Limitations on Assessment
Generally, the IRS has three years to assess a tax determined to be due. This rule provides that the three years begin to run from the latter of the due date of the return or the date the return is filed. There are several exceptions to the three-year rule. The first exception to the rule exists if the taxpayer voluntarily agrees to extend the three-year period. Another exception to the three-year rule is the six-year exception which applies if the taxpayer underreports more than 25% of the gross income stated on the original income tax return. The final exception to the three-year rule is the fraud exception which provides that there is no applicable statute of limitations where the Service can establish fraud.
The filing of an amended return that no longer reflects a 25% understatement or is no longer fraudulent does not shorten the statute of limitations. Additionally, amended returns do not extend the original 3-year period.
Statute of Limitations for Seeking an Administrative Appeal
For income, estate or gift taxes, after the IRS issues a 30-day letter, the taxpayer has 30 days to file a protest to contest the examiner’s determination. If the taxpayer fails to file a protest, Appeals will not obtain jurisdiction of the matter.
Statute of Limitations for Filing a Petition with the United States Tax Court
With only a few exceptions, the IRS cannot assess an income, estate, or gift tax deficiency until they issue a statutory notice of deficiency. The statutory notice of deficiency gives the taxpayer 90 days to file a petition in the United States Tax Court challenging the proposed deficiency (150 days if the taxpayer’s address is outside of the country on the day the notice of deficiency is mailed and the taxpayer is out of the country on that day). If the taxpayer files a petition with the Tax Court, the IRS cannot assess the proposed deficiency until after the Tax Court’s decision becomes final.
Statute of Limitations for Filing an Appeal from a Decision of the US Tax Court
If a party is unsatisfied with a decision of the Tax Court, said party can appeal the decision to the United States Court of Appeals for the city or town that is the legal residence of the petitioner on the date the original petition was filed. The notice of appeal must be filed with the Tax Court within 90 days from the Court’s entry of the decision. If an appeal is filed by one party within the 90 days, the remaining parties have 120 days from the Court’s entry of the decision (30 additional days) to file an appeal. However, a timely notice of appeal does not stay the Service’s ability to assess and collect the liability in issue unless the taxpayer posts a bond with the Tax Court on or before the filing of the notice of appeal.
Statute of Limitations for Filing an Appeal for a Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty is not subject to the notice of deficiency procedures. However, pursuant to the Taxpayer Bill of Rights 2, the IRS is required to issue a notice to an individual the IRS has determined to be a responsible person with respect to unpaid trust fund taxes at least 60 days prior to issuing a notice and demand for the penalty. The taxpayer has 60 days from the date of the notice to file an administrative appeal. The statute of limitations shall not expire before 90 days after the date on which the notice was mailed. The provision does not apply if the Secretary of the Treasury finds that the collection of the penalty is in jeopardy.
The statute of limitations for assessing the Trust Fund Recovery Penalty is basically the same for the individual as the corporation except that assessment of all four quarters against an individual runs from April 15th of the year following the quarters in issue. For example, where a corporation files timely Form 941 quarterly returns for 2004, the statute of limitations begins to run as to any potential responsible officer on April 15th of 2005 and would expire on April 15th of 2008. Keep in mind that if a corporation fails to file returns or files late, that affects the statute as to potential responsible officers. Also, the taxpayer and the IRS may agree to extend the statute of limitations. However, the extension must be obtained from the responsible officer; a corporate extension is not effective against the individual.
Statute of Limitations for Collection
The IRS has ten years from the assessment date to either collect the tax by administrative means (seizures, levies, offsets) or begin a suit for collection or judgment. If the IRS does not commence a suit for collection or judgment, the statute of limitations expires 10 years after the date of assessment. If the IRS commences a timely suit to collect a tax or obtain a judgment, it may continue its efforts to administratively collect the tax beyond the ten-year period.
The IRS and the taxpayer may agree to extend the statute of limitations for collection if the extension occurs within the 10-year period. Generally, an extension filed by one spouse is not applicable to the other unless signed by the other, or unless the signing spouse has power of attorney.
The ten-year statute of limitations for collection can be tolled under various circumstances, which include but are not limited to bankruptcy, filing of an offer in compromise, request for Collection Due Process Hearing or Request for Taxpayer Assistance Order.
Statute of Limitations for Assessment of a Transferee
IRC §6901 is utilized where the taxpayer has conveyed title to property after the accrual of a tax liability but prior to the creation of an assessment lien and said transfer is fraudulent under state law. The procedure involves the issuance of a notice of deficiency to the transferee. The transferee has the right to challenge the notice of deficiency by filing a petition with the United States Tax Court within 90 days of the issuance of the notice.
The IRS has one year after the expiration of the applicable statute of limitations against the taxpayer to administratively assess transferee liability. If there are successive transfers, the statute of limitations against a transferee of a transferee is one year after the expiration of the statute against the preceding transferee to a maximum of three years after the expiration of the assessment period of the initial transferor (the taxpayer). If the taxpayer’s assessment period is tolled (i.e., failure to file, fraud or voluntary extension), the corresponding period against the transferee is also tolled.
Statute of Limitations for Commencing a Suit for Fraudulent Conveyance
IRC §7401 grants authority for the United States Department of Justice to commence a court action for the collection of taxes, if authorized by the Secretary. This would include a suit for fraudulent conveyance which is often utilized in lieu of administrative collection action against a transferee/nominee/alter ego. The IRS prefers a judicial remedy because it provides the benefit of clear title, thereby maximizing the return upon sale. Since state law is not applicable to the Service, the IRS’s position is that the Department of Justice can commence such an action anytime within the 10-year collection period (including any extensions) provided for in §6502.
Statute of Limitations for Claim for Refund
If the taxpayer does not timely file a petition in the Tax Court, the deficiency will be assessed and the IRS will proceed with collection. The taxpayer, however, can still pursue an administrative claim for refund after paying the assessed tax deficiency. If the refund claim is denied, or if the IRS fails to act on the claim within 6 months, an action for refund can be commenced in a federal district court or the United States Court of Claims. A claim for refund must be filed within the later of three years from the date the return was filed or two years from the date the tax was paid.
For divisible taxes, such as employment taxes or 100% penalty taxes, payment of the smallest allowable portion of the total tax liability, coupled with the filing of a claim for refund, will usually stop collection efforts on the unpaid portion of the tax until after the refund claim has been determined.
Statute of Limitations for Filing a Claim for Relief from Joint and Several Liability
In order for a taxpayer to obtain relief from joint and several liability, he/she must make an election on a Form 8857 no later than 2 years after the date the Secretary has begun collection activities with respect to the individual making the election.
If the taxpayer makes an election and the IRS mails a notice denying relief or if the Service does not act within 6 months, the taxpayer can petition the United States Tax Court within 90 days of the later of the IRS denial or after expiration of the six month period. This means that the taxpayer must petition the Tax Court within 90 days of a rejection by the IRS. However, the taxpayer may petition the Court as early as six months and one day after the taxpayer filed his/her original request for relief. The IRS is prohibited from taking any collection action from the filing date of the election until after the expiration of the 90 day period discussed in the preceding sentence, or if a petition to the US Tax court is filed, until after the Tax Court decision becomes final, plus 90 days. During the time that collection is prohibited, the statute of limitations on collection is tolled plus 60 days.
Statute of Limitations for Filing a Request for a Collection Due Process Hearing
Prior to actually levying on assets to enforce collection, the Internal Revenue Service must send certain required notification. A Final Notice of Intent to Levy must be sent before an actual levy can be issued. The taxpayer has 30 days from the date contained on the Final Notice of Intent to Levy to file a Collection Due Process Appeal (normally on a Form 12153). Absent the filing of a Collection Due Process Appeal, the Internal Revenue Service can then levy on wages, bank accounts and other property at the expiration of the 30 days.
If the taxpayer timely exercises his/her right to appeal a notice of lien or notice of intent to levy, a hearing will be held before an Appeals Officer of the IRS. If the taxpayer is dissatisfied with the determination of the Appeals Officer, the taxpayer may file a request for judicial review of the Appeals Officer’s determination within 30 days of the determination. The Appeal should be made to the Tax Court if the Court would have jurisdiction of the underlying liability. If the Tax Court would not have jurisdiction of the underlying liability, the request for review should be made to the Federal District Court. If the taxpayer selects an incorrect forum, he/she has 30 days from notification of selection of an incorrect forum to file the appeal with the correct court. The statute of limitations under §§§6502 (collection), 6531 (criminal) and 6532 (other suits) is suspended during the period during which the hearing and appeals thereto are pending.
Statute of Limitations for the Right of Redemption
A right of redemption exists for certain persons after the sale of seized real property. The right of redemption must be exercised within 180 days of the sale. To redeem real property, the redeemer pays the purchaser the sum of money paid by the purchaser for the property plus interest (20% per annum).
Statute of Limitations for Appealing a Default or Termination of an Installment Payment Agreement
The IRS must notify taxpayers 30 days before altering, modifying or terminating any installment agreement for any reason unless the collection of tax is determined to be in jeopardy. The IRS must include in the notification an explanation of why the IRS intends to take this action. The taxpayer has the right to file an appeal of the IRS alteration or termination within 30 days of the notice.
Statute of Limitations for Appealing a Rejected Offer in Compromise
If the IRS rejects an Offer in Compromise, the taxpayer has 30 days to file an appeal to the Appeals Division. However, there is no 30 day appeal right for a returned or defaulted offer.