Statutes of Limitations in Tax Cases

• Author: W. Patrick Cantrell
• Pages: 181-214

181

CHAPTER 4

Statutes of Limitations in Tax Cases

Statutes of Limitations: General Rules

I. History and Background

A. Definition

A statute of limitations (S/L) is a legislative enactment prescribing the

period of time within which an action may be brought upon certain

claims or within which cert ain rights may be enforced.

B. Types of S/L

The I.R.C. has a variety of different statutes of limitations. There are,

in fact, five major types of statutes of limitations affecting federal tax

matters:

1. Assessment,

2. Collection,

3. Transferee liability,

4. Penalties, and

5. Criminal tax prosecutions.

II. Tax S/L Definitions

A. Assessment

Assessment is the act of recording a tax liability on the books of the

IRS service center or other appropriate government office. There can

be no collection action (liens, demands, levies, etc.) without “assess-

ment” having first occurred.1 A taxpayer may determine the exact date

of assessment by inspecting a record (transcript) of account. The IRS is

required to furnish this information to a taxpayer or his or her repre-

sentative free of charge. An assessment may occur summarily, as, for

example, with a mathematical correction, or through the deficiency

notice procedure.

182 STATUTES OF LIMITATIONS IN TAX CASES

B. Deficiency

A deficiency is the excess of the true tax liability over the tax as reflec ted

on a filed tax return. Generally, a deficiency is determined by exami-

nation (audit) of a tax return. A service center math correction for this

purpose does not constitute a deficiency determination. A deficiency

proposed by the Examination Division is not an assessment. As long as

a deficiency is being contested in either the IRS Appeals Office or the

tax court, there is no assessment and thus no collection can occur.2

C. Tax Collection

This is either a voluntary payment of the tax by a taxpayer or an invol-

untary payment through IRS enforcement action (levy).

D. Levy

A levy means seizure or distrai nt of a taxpayer’s money (bank account)

or property by any means whatsoever.3

III. General Assessment Rules

A. General Rule

As a general rule, all income taxes (including reported taxes and tax

deficiencies) must be assessed within three years after an income tax

return is filed.4

B. Early Filed Returns

Normally the return fil ing date initiates the S/L period for assessment.

But if a return is filed before its due date, the three-year period starts

running on such due date.5

C. Incomplete or Invalid Returns

To start the running of the S/L for assessment purposes, a filed return

must disclose income and deductions in a uniform and complete

manner so that the handli ng and verifying of the return can be easily

accomplished. Moreover, modification of printed forms, such as strik-

ing out the language that the form is signed under penalty of perjury,

invalidates an otherwise valid return, thereby preventing the S/L from

beginn ing to run.6

The test to determine whether a document is sufficient for S/L

purposes has several elements:

• There must be sufficient data to calculate tax liability.

• The document must purport to be a tax return.

• There must be an honest and reasonable attempt to satisfy the

requirements of the tax law.

• The taxpayer must execute the return under penalties of perjury.7

General Assessment Rules 183

D. Returns Completed by the IRS

If the IRS is forced to prepare and execute a return for the taxpayer

under the procedures prescribed by I.R.C. §6020(b), the assessment

S/L will not start to run.8

E. Employment Tax Returns

For employment tax returns (941s), the three-year S/L period begins

running on April 15 of the succeeding calendar year.9

F. Joint Return after Separate Returns

In the case of filing a joint retu rn after separate returns have been filed

by spouses, the S/L begins to run on the new joint return on the date

the latest separate return was filed.10

G. Amended Tax Returns

1. Effect Of

When the return as required by law has been filed and thereafter

an amended return is filed, the S/L period begins to run from the

date the original return was filed.

2. Amended Return with Tax Due

Where an amended return is filed showing additional tax due

(within sixty days of the S/L expiration), the IRS has sixty days

after receiving the return to assess the tax.11

H. 25 Percent Omission Rule

If the taxpayer omits from gross income an amount in excess of 25

percent of the amount of gross income stated in the return, a six-year

assessment limitation period applies in lieu of the normal three-year

period.12

1. Calculation of the 25 Percent Omission

For purposes of the 25 percent omission rule, gross income means

gross receipts without reduction for cost of sales.13

2. Disclosure of Omission

An item will not be considered as omitted from gross income if

information, sufficient to apprise the IRS of the nature and amount

of such item, is disclosed on the return.14

3. Burden of Proof

The burden of proof of omission of more than 25 percent of gross

income for purposes of the six-year S/L period is on the IRS.15 The

IRS must possess evidence of the 25 percent omission before a defi-

ciency notice is issued.16

4. Overstated Deductions

The IRS cannot invoke the six-year S/L based on overstated deduc-

tions; it can do so only based on omitted gross income.17