Owe the IRS Money? How Long Do They Have to Collect?

Have you ever wondered how long the IRS has to question and assess additional tax on your tax returns? For most taxpayers who reported all their income, the IRS has three years from filing the returns to examine them. This period is termed the statute of limitations. But wait – as, in all things taxes, it is not that clean-cut.

Here are some complications:

You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you file your 2021 return on February 15th, 2022, or April 15th, 2022, the rule does not start running until April 18th, 2022 (that's not a typo). The due date for 2021 returns was delayed from April 15th to April 18th because of a holiday in the District of Columbia (Emancipation Day) and a weekend. The April 18th date applies even if you don't live in DC.

Due to the Covid-19 pandemic, the IRS extended the original due date to May 17th, 2021, for 2020 returns and July 15th, 2020, for 2019 returns. As a result, the statute of limitations for refunds expires May 17th, 2024, for 2020 returns, and July 15th, 2023, for 2019 returns.

You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer's delinquency or under a filing extension granted by IRS. For example, your 2021 return is on extension until October 17th, 2022, and you file on September 1st, 2022. The IRS's statute of limitations for further assessments will end on September 2nd, 2025. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious, you may wish to retain verification of when the return was filed. For electronically filed returns, you can secure the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office when you mail the return.

You file an amended tax return – If you subsequently discover you made an error after filing an original tax return, an amended return is used to correct the original.

The amended tax return filing does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from receiving the return to assess additional tax.

You understated your income by more than 25% - When a taxpayer underreports their gross income by more than 25%, the three-year statute of limitations is increased to six years.

In determining if more than 25% of income has been omitted, capital gains and losses aren't netted; only profits are considered. These "omissions" don't include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services without a reduction in the cost of those goods or services.

You file three years late – Suppose you procrastinate and file your return three years or more after the April due date for that return. You will have to pay what you owe plus interest and late filing and late payment penalties if you owe money. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $450 or more minimum late filing penalty (the amount is adjusted for inflation each year). No refunds are issued three years after the filing due date.

You haven't filed at all – In situations where no tax return has been filed, or there's a fraud (the willful intent to evade tax), there is no time limit for the IRS to assess the tax or additional tax or to take court action.

10-year collection period – Once an assessment of tax has been made within the statutory period; the IRS may collect by levy, or court proceeding started within ten years after the evaluation or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the ten years.

Discarding tax records - Remember not to toss your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard documents that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don't want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase forms for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

A word of caution about discarding those tax records – to limit your exposure to ID theft, be sure to dispose of the documents safely and securely, such as by shredding paper files. Or, if the records are stored on your computer, delete them or destroy the hard drive when you take the device out of service.

State statute of limitation – Most, but not all, states follow the federal 3-year statute of limitations and 10-year collection period rules. Contact this office if you need further information about your state's statute of limitations.

If you are behind filing your returns and would like to get caught up, please give this office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can also help with that.