Statutes of Limitations for Tax Assessments Are Not What They Seem

By: Tyler B. Korn, Esq.

Claims that have slumbered too long are difficult to prosecute, as the passage of time tends to cause evidence and records to be lost, memories to fade, and witnesses to disappear. Statutes of limitation are therefore designed to promote justice by preventing surprises.

However, it is all too often that statutes of limitation on the Internal Revenue Service’s federal income tax collection create as many surprises as they prevent.

Assessment of any federal tax (including any interest, additions, and penalties imposed thereon) generally must be made by the IRS within a 3-year period beginning with the date that a return is filed.

A number of important but little-known exceptions to this general three-year statute of limitations, however, often catch both taxpayers and their attorneys by surprise.

For example, in the case of pass-through entities (such as partnerships and S corporations), the three-year statute of limitations period runs from the date that the entity’s shareholder, member, or beneficial owner files its return, not from the date that the pass-through entity files its return.

Another often-overlooked exception applies where there has been a failure to notify the IRS of certain transfers abroad. Failure to notify the IRS of certain foreign transfers extends the assessment period to three years after the date that the IRS is notified. The same rule applies to a taxpayer’s failure to notify the IRS of certain distributions in connection with a tax-free corporate division.

One of the other most important exceptions to the general statute of limitations rule is that the assessment period is extended to 6 years for income tax returns that omit from gross income more than 25% of the gross income that is reported. The same rule applies for estate, gift, and excise tax returns.

An even more serious exception to the general statute of limitations period arises in “false, fraudulent, and no return” situations. No statute of limitations whatsoever applies if a taxpayer files a false return, willfully attempts to evade tax, or fails to file a return in the first place. Most problematic is the fact that even innocent miscalculations of tax can result in a “false” return that will cause the assessment period to remain open indefinitely.

Additionally, “willful evasion” of tax (which voids any statute of limitation) is often extremely difficult to distinguish from “willful avoidance” of tax – except that the former is illegal and the latter is legal. Just as civil litigators tend to allege fraud in all plaintiff contract claims in order to qualify for an award of punitive damages, the IRS tends to allege fraud in as many serious collection actions as possible in order to avoid application of the statute of limitations.

Taxpayers with IRS disputes or questionable items on their returns would be well advised to avoid surprises by determining which type of statute

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