Statute of Limitation: Individuals and U.S.-Source Income

Editor: Valrie Chambers, Ph.D., CPA

Federal income tax statutes of limitation generally provide taxpayers with assurances about the IRS’s assessment and collection procedures. It is that “generally” that engenders difficulties. The difficult determinations tax professionals face are not with the general rules but with those rules that apply in the unusual—but not so rare—situations where no assurances can be given. This item describes some of those unusual situations.

The general rule in Sec. 6501 provides for a three-year period for the determination and assessment of an income tax liability. In almost every situation involving an income tax return, it is important for practitioners to keep the statute of limitation in mind, whether they are reviewing a return they themselves prepared or a return prepared by the taxpayer or another preparer. Unfortunately, there are exceptions to this general rule.

The statute of limitation begins to run with the filing of an income tax return and ends (generally) three years after the return is filed. When does that three-year period begin? It begins with the later of the filing of an income tax return or the due date of the return, as extended. Does this period begin with the mailing of the tax return (taxpayers should always obtain receipts for mailing) or the return’s arrival at the IRS Service Center? Does the filing begin with the transmission of an electronically filed tax return or the IRS’s acceptance of the return? For mailed returns (including returns sent by private delivery services), Sec. 7502 provides the rules, stating that a return is filed as of the postmarked date on the envelope. For electronically filed returns, Regs. Sec. 301.7502-1(d) uses the electronic postmark given by the authorized electronic return transmitter.

Is a return mailed to an incorrect address considered filed? Usually this does not cause a problem; however, a return filed with the wrong Service Center may not begin the running of the statute. A return is not considered “filed” until it is received by the correct Service Center (Winnett, 96 T.C. 802 (1991)). Myriad circumstances can raise questions about the date filed in accordance with Sec. 6501. The most reliable way to secure some level of assurance is to obtain a transcript from the IRS that will show (with some certainty) the date the income tax return was filed. A transcript can be requested by phoning the IRS or by filing Form 4506-T, Request for Transcript of Tax Return. See the form’s instructions for the types of transcripts available. The IRS does not charge for this service.

Before the IRS can attempt to collect the tax assessed, there must be an actual assessment. The authority for assessing the income tax shown on a filed return is found in Sec. 6201 and is made by the Service Center. (See also Regs. Sec. 301.6201-1(a)(1).) Regs. Sec. 301.6203-1 provides that the IRS will send all pertinent details in a “summary record of assessment,” available to the taxpayer upon request. If additional tax is proposed (a deficiency), under Sec. 6212 the IRS must deliver to the taxpayer a notice of deficiency within the period prescribed in Sec. 6501. The IRS usually follows these rules, but in a tax controversy a practitioner should always verify the IRS’s compliance with the statute.

Exceptions

After determining when the return was filed, it is imperative that the practitioner review the exceptions to make sure that none apply. Some of the exceptions listed in Sec. 6501 are:

• For a false or fraudulent return with the intent to evade tax, assessment can be made at any time (Sec. 6501(c)(1)). A false return is one that is knowingly false, and not merely false as a result of error or negligence (Brister, 35 Fed. Cl. 214 (1996)).
• The statute does not begin to run where there is a willful attempt to defeat or evade tax (Sec. 6501(c)(2)).
• If no return is filed, the statute does not begin to run (Sec. 6501(c)(3)). Also note that Sec. 6501(b)(3) specifically provides that the filing of a return by the IRS, commonly referred to as a substitute for return, under authority of Sec. 6020(b), does not start the running of the statute.
• Prior to the running of the statute, if there is a written consent between the IRS and the taxpayer to extend the period for assessment, that period does not end until the expiration of the period agreed upon (Sec. 6501(c)(4)). When the taxpayer has made an offer in compromise, the IRS may require the taxpayer to agree to extend the period for assessment (Regs. Sec. 301.7122-1(i)).

There is a special rule relating to amended returns. If within 60 days of the expiration of the limitation period, a “written document signed by the taxpayer” shows that additional tax is owed, the period for IRS assessment will not expire until 60 days after the IRS receives such a document. This is designed to prevent an individual’s last-minute “cleansing of the soul” with the filing of an amended return to report additional tax due right at the end of the running of the statute (Sec. 6501(c)(7)).

Instead of the normal three-year statute of limitation, there is a six-year statute where the taxpayer omits an amount in excess of 25% of the amount of gross income stated in the return (Sec. 6501(e)).

Practical Steps

Those are some of the technical rules relating to the federal statute of limitation on individual income tax assessments, but there are other things that it is important for practitioners to do in real-world situations:

1. Verify that a return was actually filed—the best way to determine this is to obtain a record of account from the IRS;

2. Obtain a summary record of assessment, if appropriate; and

3. Confirm, as well as possible, that there are no statutory exceptions to the limitations provided by Sec. 6501, paying particular attention to the potential for the IRS to assert that there was a fraudulent return or an omission of 25% of gross receipts. Also ask whether the statute might have been extended by filing an offer in compromise or other procedure that results in a temporary suspension of the statute.

It is the CPA’s professional responsibility to ensure that the IRS has not exceeded its authority and deprived his or her client of the protections afforded by the statute of limitation. By knowing the rules and paying attention to the statute of limitation, practitioners can help guard clients against the IRS’s collection of erroneous assessments.

EditorNotes

Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, TX. Robert Moïse is with WebsterRogers LLP, Charleston, SC. Prof. Chambers and the author are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at valrie.chambers@tamucc.edu.