Statutes of Limitations in Federal Tax Cases

Statutes of Limitations in Federal Tax Cases

There are a number of statutes of limitations in the context of a federal tax debt.  The most important statutes of limitations with respect to civil tax matters are (1) the statute of limitations for the assessment of a tax, and (2) the statute of limitations for the collection of a tax that has been assessed.

The statute of limitations for collection is generally ten years from the date of assessment.[1] However, a number of events can “toll” the 10-year statute of limitations.  Among the more common “tolling” events are bankruptcy proceedings, collection due process hearing requests, innocent spouse relief requests, and offers in compromise.  Other events may toll or suspend the collection statute of limitations as well.

The statute of limitations for assessment of federal taxes is generally three years after the later of the date that the tax return was filed or the due date, including extensions.[2] The Internal Revenue Code (IRC), however, provides several exceptions to this general rule that can extend the limitations period to six years or even indefinitely.[3]

Sixty Days

• Amended returns: if the Secretary receives notice within 60 days of the end of the limitations period that additional taxes are owed, then the period of assessment for the additional amount is 60 days after the Secretary receives notice. Amendments that do not increase taxes owed have no effect on the limitations period.

Six Years

• Large understatements of income and basis overstatements: Omitting more than 25% of gross income (a “substantial omission”) on a filed return extends the statute of limitations to six years after the filing date. Overstating unrecovered cost or other basis is considered an omission from gross income.
• Omitting more than $5,000 of foreign income from gross income: Omission of more than $5,000 of foreign income from an asset listed under § 6038D increases the statute of limitations to six years after the filing date.
• U.S. shareholders of foreign corporations omitting the corporation’s subpart F income: A shareholder’s failure to include her pro rata share of the foreign corporation’s subpart F income in her reported gross income, as required under § 951(a), extends the limitations period to six years after the filing date.
• Omitting substantial estate tax or gift tax: For chapter 11 estate tax returns, failure to disclose more than 25% of the gross estate extends the assessment period to six years after the filing date of the deficient return. Similarly, for chapter 12 gift tax returns, failure to disclose more than 25% of the total amount of gifts for the taxable year extends the assessment period to six years after the filing date of the deficient return.
• Personal holding company tax: Failure of personal holding companies to disclose certain items of gross income (described by § 543), and names and addresses of owners of more than 50% in value of the outstanding stock of the corporation, extends the assessment period to six years after the filing date of the deficient return.

Indefinitely

• Failure to notify the IRS of certain foreign assets and transactions: When taxpayers hold foreign interests or participate in foreign transactions, the IRS takes the position that the three-year limitations period does not start running until the IRS receives certain information that is required to be reported. Thus, a taxpayer’s failure to file the required forms, as provided under the IRC sections below, to report information regarding foreign assets and transactions can extend the limitations period indefinitely.
  • Applicable foreign assets and transactions:
    • Shares of foreign investment companies (§ 1295(b), § 1298(f))
    • Foreign corporations and partnerships controlled by the taxpayer (§ 6038)
    • Foreign-owned domestic corporations must report transactions with related parties (§ 6038A)
    • Transfers of property to foreign corporations and partnerships (§ 6038B)
    • Interest in foreign financial assets, such as financial accounts, stocks, and interests in foreign corporations, that in the aggregate exceed $50,000 (§ 6038D)
    • Acquisitions of foreign stock (§ 6046)
    • Acquisition, disposal, or change of interest in foreign partnerships (6046A)
    • Creation of, or transfer to or from, a foreign trust, or the death of U.S. owners of a foreign trust (§ 6048)
  • Waiver: The IRS and the taxpayer can agree in writing to extend the limitations period by any length of time. The agreement must be made prior to the expiration of the applicable statute of limitations.
  • False or fraudulent returns and willful attempts to evade tax: The IRS has no time limit on assessing tax in the case of a false or fraudulent return filed with the intent to evade tax. Similarly, there is no time limitation on assessing tax in cases of willful attempts to defeat or evade tax in any manner.
  • Failure to file: Total failure to file a return extends the limitations period indefinitely. Failing to sign an otherwise complete return counts as a failure to file, as does altering the “penalty of perjury” language at the bottom of the return.
  • Termination of private foundation status: Taxes on terminations of private foundation status under IRC § 407 may be assessed at any time.
  • Failure to disclose on a tax return a gift of property taxable under chapter 12: Tax on an undisclosed gift of property taxable under chapter 12 can be assessed at any time.
  • Criminal restitution orders: The IRS can assess or enforce restitution ordered under § 6201(a)(4) at any time.
  • Listed transactions: When a taxpayer fails to disclose listed transactions that must be disclosed under IRC § 6011, the one-year limitations period for assessment of tax will not begin until the taxpayer discloses the required information to the government, or until a material advisor satisfies the government’s § 6112(b) request regarding the transaction.

Failing to file information returns related to foreign assets are a common basis for the IRS asserting that the statute of limitations is extended.  Common foreign information returns include Form 5471, Form 3520, and Form 3520-A, among others.

[1] IRC at § 6502(a)(1).

[2] Id. at § 6501(a).

[3] See id. at § 6501(c) and (e).

Representation in Tax Audits & Appeals 

Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3000 to discuss our tax representation services.