The IRS statute of limitations

Generally, The IRS has the following time limits for tax related matters with certain exceptions:

1. Three years to issue you a refund;
2. Three years to audit your tax return;
3. Ten years to collect any tax due.

Together, these laws are called the statute of limitations.

Three years to issue a tax refund.


Generally speaking, tax payers have until the three years from the date of the original deadline of the tax return to claim tax refunds related to refundable tax credits. For exemple, you are eligible to claim Earned Income Tax Credit (EITC), the largest refundable credit for low income families. Your 2015 tax return is due on April 18, 2016, and you have until April 18, 2019 to file your 2015 tax return and still get the refundable EITC. 


However, the three years limitation might be expended for tax overpayments for late payments. Some taxpayers could not afford to pay tax dues with their tax return filings, and they paid off tax dues with related penalties and interest several years later. If they find out they overpay their taxes after that, the IRS will allow these taxpayers to claim their refunds either within 2 years since they pay the related taxes or within the three years from the date of the original deadline, whichever is later. 


There are also special exceptions to the 3-year statute of limitations on refunds as following:


1. Taxpayers have up to seven years to claim a refund resulting from deductions for bad debt or worthless securities;
2. The three-year statute of limitations does not apply in the situation where taxpayers are unable to manage their financial affairs due to physical or mental impairments.


Three years to audit your tax return or to assess any additional tax liabilities.


If you file your taxes before the deadline, the three years limitation is measured from the tax return due date. However, if you file your taxes after the deadline, the three years limitation is measured from your filing date. 


Exceptions to the 3-year statute of limitations on assessments and audits:


1. The IRS has six years from the date a return is filed to audit a tax return and to assess additional tax if the taxpayer omits income that amounts to more than 25% of income that was reported on the tax return;
2. The IRS also has six years to audit a tax return and assess additional tax on income related to undisclosed foreign financial assets if the omitted income is more than $5,000;
3. The statute of limitations on audits and assessing additional tax remains open indefinitely if the taxpayer files a false or fraudulent tax return.


Ten years to collect outstanding tax liabilities.


This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. A tax liability can be finalized because it's the amount of tax reported on a tax return that is filed by the taxpayer. Or a tax liability can be finalized by an assessment of additional tax from an audit, or a proposed assessment that has become final. From the day that a tax liability is finalized, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever because the statute of limitations on collecting the tax has expired.


The ten-year statute of limitations on collections can be suspended in the following situations:


1. While the IRS is reviewing an offer in compromise, installment agreement, innocent spouse relief, collection due processing hearing;
2. While a taxpayer is under the automatic stay of bankruptcy protection plus an additional six months;
3. For periods when the taxpayer resides outside the United States for at least six months.


Related tax planning tips 


It is in your best interest to file your tax returns at your earliest possible convenience, it starts the clock ticking on the three-year statute for audits and the ten-year statute for collections. Also, you might still have time to lower your taxes by considering certain factors, including IRA contributions and prepaid education expenses, and so forth.


There are unique planning opportunities available to the filer, if multiple tax years are involved, as refunds that are still allowed under the three-year time limit can be utilized to pay off other tax debts owed to the IRS or applied to your current year's estimated taxes.

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