The IRS’ Complex Statute of Limitations

An IRS tax audit can be expensive and stressful. That is why is always important to check whether the IRS statute of limitations has expired for the audit. The expiration of the statute of limitations can terminate an audit.

When the IRS begins auditing a taxpayer, the statute of limitations begins either when the tax return was due, April 15, or if you filed after the due date, the date the tax return was actually filed. Typically, the IRS is only allowed to go back three years when auditing. However, an audit can go back six years if there is a substantial understatement of income. A substantial understatement is if a taxpayer has left off 25 percent or more of their gross income. When there are offshore accounts involved, the IRS can audit back to six years if a taxpayer omits more than $5,000 of foreign income.

If the IRS suspects tax fraud or a tax return was never filed there is no limit to how far back the IRS is allowed to go. Other ways the statute of limitations does not run is if a taxpayer does not sign their return or if they alter the “penalties of perjury” language at the bottom of the return.

For tax collection, the statute of limitations is known as the CSED. CSED is an IRS abbreviation for Collection Statute Expiration Date as it appears in IRS computer taxpayer account records, which tells IRS collections officers what the IRS system has calculated as the statute of limitations for tax collection. The general rule is that the IRS must collect taxes within 10 years of the date of assessment.  The assessment date is the date of the filing of the return or the date tax liabilities are entered as assessments in the IRS’s records (for example, in case of a tax audit). 

Although the computer’s CSED date is sometimes inaccurate, it is still generally relied on by IRS employees in practice. When the IRS is prevented from collecting by law, time is added to extend the IRS’s statute of limitations period to collect.  Some common actions extending the IRS’s time to collect include Requests for IRS Installment Agreement or Payment Plan, requesting an Offer in Compromise, requesting a Collection Due Process Hearing, or filing Bankruptcy.

In all cases, we strategically check whether the IRS statute of limitations has expired for the audit or tax collection. The expiration of the statute of limitations, which is complex to calculate in some cases, can often terminate an audit or collection activity.

Taxpayers who are undergoing an audit or tax collection defense should contact Patel Law Offices. Over the years, our office has successfully assisted numerous taxpayers regarding their tax compliance issues.

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