The statute of limitations for tax returns provides a time frame within which the IRS can audit the responses received from a given taxpayer. Once the time frame expires, the IRS cannot conduct a review of the tax return and therefore, if the return was erroneous, no liability can arise. The time limitation affects both the taxpayer and the tax collector. This, therefore, means that the taxpayer can also not follow up on an unclaimed tax refund beyond the statute of limitations.
Below are the various statutes of limitations that affect tax returns:
General Statute of Limitation
In general, tax returns can only be audited for up to three years after such a return is filed or after the deadline for filing the return, whichever date falls later. This means that if a taxpayer files before the April tax deadline, the statute of limitation will lapse 3 years after the April deadline date.
On the other hand, if the taxpayer files for an extension or files late, the statute of limitation will lapse 3 years after the date of filing.
If the IRS has evidence to show that a taxpayer may have understated his income for a given year by more than 25%, the statute of limitations is increased to 6 years.
In such a case, the IRS can audit returns 6 years after they are filed or 6 years after the tax deadline for the year that the tax returns were filed – whichever comes later.
In Case of Fraud
In case the IRS suspects that there was wilful tax fraud by a taxpayer, then they can audit tax returns up to an indefinite time. However, the burden of proof lies with the IRS to show sufficient reason to suspect fraud.
If a taxpayer failed to file a tax return in a given year, then the IRS or state tax authorities will have no statute of limitation and can, therefore, audit such a taxpayer with no time limitations. It is, therefore, advisable to file a late return, so as to avoid giving the IRS this unlimited time frame.
In the case of a late tax return, the regular statute of limitation will kick off as soon as the late return is filed. This means that in general, the statute of limitation will lapse 3 years after the late return is filed.
In the case of a criminal investigation, the IRS has a statute of limitation of 6 years from the time the taxpayer files a return.
The statute of limitation is suspended as soon as a taxpayer successfully files and is granted bankruptcy.
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