STATUTE OF LIMITATIONS PART I: How important are they in the tax world?

At Tax Whistleblower Law Firm, we often get inquiries from potential clients with information about taxpayers’ violations that occurred over 10 years ago.  Often times the circumstances dictate that we do not get involved in these types of cases; however, if there are extenuating circumstances we may get involved.  Why?  The IRS only has certain time periods to examine (audit) a taxpayer’s tax liability, and to assess (determine that the taxpayer owes additional tax). 

The following is a summary of the main time periods in which the IRS must act or be barred by statute from assessing additional taxes against tax payers.

General 3 year rule and exceptions:  In general, the IRS has 3 years after the filing of a return to assess additional tax liability against a taxpayer.  See I.R.C. § 6501.  There are 11 exceptions to the 3 year rule, they are as follows:

  1. False or Fraudulent Returns with the intent to evade tax, (See I.R.C. § 6501(c)(1));

  2. Willful attempt to evade tax, (See I.R.C. § 6501(c)(2));

  3. No return is filed by the taxpayer, (See I.R.C. § 6501(c)(3));

  4. Extension of the 3 year period by agreement of the taxpayer and IRS, (See I.R.C. § 6501(c)(4));

  5. Tax from changes in certain income tax or estate tax credits (i.e. foreign tax credits) (See I.R.C. § 6501(c)(5));

  6. Termination of Private Foundation Status, (See I.R.C. § 6501(c)(6));

  7. Within 60 days of end of 3 year rule, IRS receives an amended return, (See I.R.C. § 6501(c)(7));

  8. Failure to Notify IRS of certain foreign transfers (generally related to a passive foreign investment company/fund), (See I.R.C. § 6501(c)(8));

  9. Gift tax liability for unreported gifts, (See I.R.C. § 6501(c)(9));

  10. Listed Transactions, (See I.R.C. § 6501(c)(10));

  11. Orders of Criminal Restitution under I.R.C. § 6201(a)(4), (See I.R.C. § 6501(c)(11)).

Expanded 6 year rule:  Additionally, the IRS may assess tax beyond the 3 year rule and has 6 years from the date of the filing of the return to assess tax when a taxpayer undertakes the following substantial omissions:

  1. Omits income that is in excess of 25% of the amount of gross income stated on the return; (See I.R.C. § 6501(e)(1)(A)(i));

  2. Omits at least $5,000 in income, which is reportable under I.R.C. § 6038D, (See I.R.C. § 6501(e)(1)(A)(ii));

  3. On a gift/estate tax return, omits amounts from the reported gross estate in excess of 25%, (See I.R.C. § 6501(e)(2));

  4. Omits excise taxes due in excess of 25% of the excise tax return reported by the taxpayer, (See I.R.C. § 6501(e)(3));

With respect to taxes, the IRS is not the only who is under a deadline to act.  A taxpayer must also file their claim for refund within certain time limitations as described below.  This also explains why there might be a delay from the time the IRS collects the taxes owed by a taxpayer and when the IRS pays an award to a whistleblower.

Refund Cases and Statute of Limitations:  Generally under I.R.C. § 6511, a taxpayer has 3 years from the time the return was filed or 2 years from the time the tax was paid to file a refund claim.  Exceptions to this 3/2 year period are:

  1. 7 year period for refunds related to bad debts and worthless securities deducted on the taxpayer’s return, (See I.R.C. § 6511(d)(1));

  2. 3 years from the date the return was filed that generated the Net Operating Loss (NOL) or capital loss carryback to claim a refund related to NOL carryback or capital loss carryback, (See I.R.C. § 6511(d)(2));

  3. 10 year period for credits or refunds related to the Foreign Tax Credits, (See I.R.C. § 6511(d)(3));

  4. 3 years from the date the return was filed that generated

  5. employment tax refunds, (See I.R.C. § 6511(d)(5));

  6. 1 year for refunds related to income recaptured from a qualified plan termination, (See I.R.C. § 6511(d)(6));

  7. 2 years from the determination date of self-employment taxes by Tax Court, (See I.R.C. § 6511(d)(7)); and

  8. 5 years from the date of determination of disability compensation when uniformed services retired pay is reduced, (See I.R.C. § 6511(d)(8)); the unused credit which results in a carryback, (See I.R.C. § 6511(d)(4));

  9. 2 years from the date an agreement is made with respect to

If the IRS and/or the Taxpayer misses the deadline to assess tax (IRS) or file refund (taxpayer), then the IRS and/or the Taxpayer is barred from assessing (IRS) or filing for a refund (taxpayer).

If you have specific and credible information about a taxpayer's violation of tax laws and/or failure to pay his/her/its tax liabilities in excess of $2,000,000 you should consider filing a tax whistleblower claim if your information is timely.  Contact us to discuss your case and the timeliness of your information.  You may be entitled to an award between 15-30% of the tax, penalties and interest collected by the IRS.