How to Challenge the IRS Statute of Limitations on Tax Prosecution

How to Challenge the IRS Statute of Limitations on Tax Prosecution

Dealing with the IRS can be intimidating. Many people panic when they get a letter from the IRS saying they are being audited or accused of tax fraud. However, there are limits on how long the IRS has to prosecute you for tax crimes. This time limit is called the “statute of limitations.” If you can point to the statute of limitations to head off the trouble and expense of a tax audit, you should. If it is too late for the IRS to audit you, the IRS is out of luck.

Taxes are…complex. Innocent mistakes can be interpreted as suspect. It is not pleasant to have to prove you were entitled to a deduction or to find and produce receipts. An audit may target certain items with specific requests for proof, or may ask for proof of virtually every line item. And records that were available at filling might now be long gone, making the stakes of these issues significant….

Tax lawyers and accountants are used to monitoring the duration of their clientsâ€TM audit exposure, and so should you. It pays to know how far back you can be asked to prove your income, expenses, bank deposits, and more.

What is the Statute of Limitations on IRS Audits and Prosecution?

In most cases, the IRS has 3 years from when you filed your return to audit you and assess additional tax. This means the IRS has 3 years to start an audit, issue a Notice of Deficiency, and assess additional tax owed. This is called the statute of limitations for assessment and collection.

However, if the IRS claims you underreported your gross income by 25% or more, the statute of limitations extends to 6 years. In cases of suspected tax fraud or evasion, or failure to file a tax return at all, there is no statute of limitations – the IRS can audit and prosecute at any time!

Key Points on Statute of Limitations for IRS Audits:

• 3 years from filing for most audits
• 6 years if IRS claims you underreported income by 25%+
• No limit if suspected tax fraud or evasion

The statute of limitations clock starts ticking on the later of: (1) the due date of your return, or (2) the date you actually filed your return. For example, if your 2015 tax return was due April 15, 2016 but you filed late on June 1, 2016, the statute begins running on June 1, 2016.

The statute can be extended beyond 3 years if you sign a waiver, allowing the IRS more time. The IRS may say an audit will go faster if you sign a waiver, but think carefully before signing away your statute of limitations protection.

When Does the Statute of Limitations Run Out for the IRS?

The statute of limitations clock stops running when the IRS formally assesses additional tax by issuing a Notice of Deficiency. This is the legal document the IRS uses to tell you how much additional tax they believe you owe. Once this Notice is issued, the statute of limitations is frozen.

This prevents taxpayers from just running out the clock before the IRS can finish an audit and assess tax. The IRS avoids losing their ability to collect by formally assessing tax before the statute runs out.

Key Points on When Statute of Limitations Stops Running:

• IRS must assess tax before statute runs out
• Assessment made by issuing Notice of Deficiency
• Statute stops running when Notice issued

After the Notice of Deficiency, if you do not file a petition in Tax Court within 90 days, the IRS will make a formal assessment of tax and start collection efforts. At this point, the statute of limitations for collection begins, generally lasting 10 years from assessment.

How to Challenge the Statute of Limitations

If you receive a Notice of Deficiency and believe the statute of limitations has expired, you can challenge it. Here are the main ways to assert the statute of limitations as a defense against an IRS audit or prosecution:

File a Petition in Tax Court

Within 90 days of receiving a Notice of Deficiency, you can file a petition with the US Tax Court challenging the IRS’s assessment. As part of your Tax Court petition, you would assert that the Notice is invalid because it was issued after the statute of limitations expired.

The Tax Court will then schedule your case for trial. At trial, the IRS has the burden of proving the statute of limitations was still open. If they cannot, the Tax Court will rule in your favor.

Claim a Refund for Taxes Already Paid

If you already paid the disputed taxes, you can file an amended return claiming a refund. On the amended return, write that you are claiming a refund because the taxes were collected after the statute of limitations expired.

If the IRS denies your refund claim, you can sue for a refund in either US District Court or the US Court of Federal Claims. In court, the IRS again bears the burden of proving the assessment was timely.

Request an Abatement from the IRS

Before going to court, you can request an abatement of the assessment from the IRS directly. File Form 843 “Claim for Refund and Request for Abatement” along with a letter explaining that the statute of limitations expired before the taxes were assessed.

If the IRS abatement request is denied, you can still pay the tax and file for a refund, or petition the Tax Court if you have not yet paid.

Common Arguments to Challenge the Statute of Limitations

There are several arguments taxpayers commonly use to challenge IRS assessments on statute of limitations grounds. Some include:

• Return Never Filed – If you never filed a return, the statute never began and the IRS assessment is invalid.
• Return Filed Late – If filed late, the statute runs from the filing date, not the due date.
• No 25% Understatement – Challenge IRS claim of a 25% income understatement to avoid 6-year statute.
• No Fraud – Argue there is no fraud or evasion, so 3-year statute applies.

An experienced tax controversy attorney can help craft the right statute of limitations argument to fight an old IRS assessment. The law on what constitutes a “return”, when it was filed, and what stops the statute from running is complex.

Tolling of the Statute of Limitations

In some cases, even if the statute of limitations has run, the IRS can argue it was “tolled” – or paused – for a period of time. This tolling effectively gives the IRS more time than the basic statute of limitations.

Some common situations where the IRS can claim tolling include:

• Taxpayer was out of country for over 6 months
• Taxpayer moved without notifying IRS
• Taxpayer engaged in fraud or evasion
• Taxpayer filed a fraudulent return
• Taxpayer involved in prior court proceeding

If the IRS asserts tolling to extend the statute, an experienced tax attorney can help argue against it. For example, you may be able to show you did notify the IRS of a move, or dispute that any fraud occurred.

Strategies to Fight an Old Tax Bill

If you get hit with an old tax bill after the normal statute of limitations, don’t panic. Here are some strategies to fight back:

• Dispute any IRS claim of fraud – argue good faith
• Carefully review when return was filed – statute runs from filing date
• Check if return qualifies as a “valid return” – complex law
• Verify any IRS tolling claim – contest if possible
• Negotiate with IRS first to resolve informally
• Hire a tax attorney to litigate if needed

With some preparation and assertiveness, you may be able to fend off an old IRS bill. And if negotiations fail, be ready to take the IRS to court if needed to assert your statute of limitations rights.

Conclusion

Don’t let an old tax bill go unchallenged. Understand how much time the IRS has to audit you or bring criminal charges. Monitor the statute of limitations leading up to the deadline. If the IRS violates the statute, fight back hard to assert your rights. An experienced tax controversy attorney can help craft a winning statute of limitations argument and take the IRS to court if needed. With the law on your side, you can defeat an illegal tax assessment and sleep better at night.

References

IRS. “Tax Crimes Handbook.” https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf

IRS. “25.6.1 Statute of Limitations Processes and Procedures.” https://www.irs.gov/irm/part25/irm_25-006-001r

Carver & Associates. “Tax Fraud Statute of Limitations.” https://gocarverllc.com/tax-fraud-statute-of-limitations/

American Bar Association. “IRS Can Audit for Three Years, Six, or Forever: Here’s How to Tell.” https://www.americanbar.org/groups/business_law/resources/business-law-today/2017-august/irs-can-audit-for-three-years/