One area that can be confusing is the statute of limitation and how it relates to refunds, audits and debt. This has generated a lot of false information that has caused some people to be very adversely affected. So let’s look at the information that we refer to as the 3 – 3 – 10 rule so that it can be easily remembered.
- There is a three (3) year period that you can claim a tax refund from the IRS before the statute of limitations negates it.
- There is a three (3) year period from filing your taxes that the IRS can audit that tax return.
- There is a ten (10) year period to collect a tax debt from when they have been finalized.
Time Limits for the Statute Of Limitations
It is very important that you understand the 3 – 3 – 10 rule and what starts the time count because many people have falsely believed that they were outside of these statutory periods when they were not and have either not claimed money that they could have been paid or have been hit with a liability that they thought was extinguished.
The information in this article is about the Federal Internal Revenue Service. There are many states that use the same time limits and requirements. However some states have extended the limits particularly on the time that a tax debt can be collected so always check with your state revenue department so that you have the right information.
When you file your tax return the clock starts on the three year audit period. This applies to any filing made after the 15th of April deadline. If you have filed your taxes early then the clock does not start until the 15th of April.
So, if you were to file your taxes in 2013 on or before the 15th of April 2013 then your discretionary audit period ends on the 15th of April 2016. If however you filed you taxes late say on the 1st of August in 2013 then the period would not end until the 1st of August 2016.
This period only applies to discretionary audits which can be called at any time in the period without any reason. There can still be a formal audit carried out if the IRS has a notion that fraud has been committed.
One area that many people have lost money is by not filling a tax return prior to the 3 year time limit that is imposed on refunds. This time limit starts on the 15th of April in the year the tax return was due to be filed.
It is important to make sure to apply for an extension from the IRS prior to this 3 year period running out so that this period is reset from the new deadline. The extinguishment of the refund amount does not mean that you do not need to file a tax return it just means that the IRS does not need to pay the refund amount so it is in your best interest to file the return the refund even if this will be taken by the IRS to pay for an outstanding tax debt.
This one of the most misunderstood sections of the taxation statute of limitations and has been used by unscrupulous tax advisers as a way to try and avoid tax bills. It is strongly recommended that you consult with a recognized tax lawyer before considering any action because there are severe penalties including imprisonment for not paying taxes.
The important part of the 10 year limitation on tax liabilities is that it only begins once the liability has been finalized. This means that if a tax return has not been submitted or the IRS has not determined a final assessed amount then the clock has not even started.
Once the amount has been finalized then after 10 years any outstanding amount, penalties and interest are extinguished. There is one limitation on this and it involves audits. If an audit is conducted and it results in a new assessment being made and finalized it resets the 10 year statute of limitations.
Filling on Time Invokes the Statute Of Limitations As Soon As Possible
While three and ten years in the future may seem like a long time they can easily be forgotten. More than three quarters of tax returns receive a refund so by filling as soon as possible you get your refund as soon as your return is processed and the time limits on audits and debt from the IRS are also started.
There are no advantages to putting of filling your tax return even if you may be assessed as having to pay the IRS. It is better to make arrangements and keep everything above board and known so that you minimize penalties and maximize returns.