Tax Audit Lawyer
For those with lingering tax issues, it seems that they can last forever. However, the Internal Revenue Service and state taxing agencies must usually assess and collect taxes with specified periods of time. Understanding the application of these rules can help taxpayers avoid agreeing to unnecessary assessments of taxes and from paying taxes that can no longer be legally collected by the taxing authorities.
Assessment Statute of Limitations (ASED)
To collect a tax, it must first be assessed by the Internal Revenue Service (IRS). In basic terms, the assessment is the date upon which the IRS denotes a tax due in its records. For most taxpayers, an assessment is made when a tax return is received and processed. However, if a tax return is not filed or the IRS contends that additional tax is due, the assessment statute of limitations (ASED) may become an issue. According to I.R.C. § 6501(a), the IRS is generally only able to assess additions to tax within three years from the later of the due date of the applicable tax return or its filing date. In a protracted examination, this can become a hindrance to the IRS and may provide a strategic consideration for a taxpayer. In other words, the IRS may have to expedite the examination to make a timely assessment. On the other hand, if a taxpayer has substantially underreported their gross receipts or has filed a false or fraudulent tax return, the ASED can extend for an additional three years – or even indefinitely. See, e.g., I.R.C. § 6501(c)(1) (false returns); I.R.C. § 6501(e) (substantial omissions). When strategizing on a case – whether in an examination, appeals, or litigation – it is important to be mindful of the ASED and the exceptions to the general three-year limitations period. If utilized properly, taxpayers can limit potential exposure to additional tax by influencing the direction of the examination or the timing of certain aspects of the IRS’ review of tax returns.
Refund Statute of Limitations (RSED)
On the other hand, there is generally a shorter period of limitations for seeking a refund or overpayment of a tax associated with a return. In general, the refund statute of limitations (RSED) is the latter of three years from when the tax return was filed or two years from when a payment for which refund is sought has been paid. I.R.C. § 6511(a). That said, for certain refunds timely sought within this period, the amount of refund that can be paid may be further limited based on timing considerations. Accordingly, for taxpayers who have had significant amounts withheld or may be due to a refund, it is important not to delay in filing a tax return as refunds will eventually be barred by the RSED. In addition, in certain circumstances where a conservative position has been taken on a tax return and there may be a basis for a refund if an amended return is filed, taxpayers should understand the RSED and consider paths to assert their rights before they expire. Unfortunately, many taxpayers unknowingly overpay the IRS and let their rights lapse before seeking a refund.
Collection Statute of Limitations (CSED)
Even if a taxpayer and the IRS may agree on the amount of tax that is owed, there is a limited amount of time within which the IRS may seek to administratively collect that tax. The collection statute of limitations (CSED) generally limits tax collections to ten years from the date that an assessment is made. I.R.C. § 6502(a). That means that if a tax was assessed more than ten years ago and the CSED has not been tolled, the IRS can no longer engage in actions such as levies and garnishments to collect the tax. As a general practice, the IRS neither regularly communicates the date of the CSED nor will notify a taxpayer upon its expiration. Considering that the IRS will retain payments made after the CSED has expired – and for which the IRS may not legally compel collection – taxpayers need to be mindful of this period when engaging in a drawn-out tax collection matter. As with the ASED, knowledge of the CSED can be a powerful tool to help reduce the total amount of taxes paid. Skilled practitioners frequently analyze the CSED when negotiating payment arrangements with the IRS or in considering strategies for addressing delinquent taxes.
Tolling and Other Considerations
While a basic understanding of the ASED, RSED, and CSED are a must for affected taxpayers, there are a host of other considerations. For instance, the ASED may be extended by voluntary agreement, by failure to identify certain transactions, and according to other conditions. Likewise, the CSED is frequently extended when taxpayers engage in Collection Due Process hearings or while a collection alternative – such as an installment agreement or Offer in Compromise – is pending consideration. While these can extend the CSED for years, they are often calculated incorrectly by the IRS, and reliance on the IRS can result in overpayments based on a misapplication of the law. Where substantial amounts are on the line, taxpayers and their representatives need to understand the intricacies and exceptions to these basic rules.
Contact a Tax Professional
If you are engaged in a civil tax audit or have an unresolved tax collection matter, you should contact a skilled tax professional like a tax audit lawyer in Hanover, MD from Crepeau Mourges to understand your rights. A tax professional can examine the facts and dates that impact the applicable statutes of limitations. Different periods may apply to different types of taxes, across different jurisdictions, and based on a host of other considerations. With proper consideration of this information, a tax professional can sometimes create a strategy that uses these laws to limit a taxpayer’s exposure to the assessment or collection of additional tax, interest, and penalties.