Background
WHEN is your return free from IRS audits? From your perspective, statutes of limitation prevent the IRS from collecting a deficiency in tax or beginning a civil or criminal case. In short, statutes of limitation provide a date of finality after which the IRS or the taxpayer can take no further actions. We all breathe a little easier when we know returns are out of the line of fire. Caveat: The countdown never starts if a return is not filed.
Three-year statute of limitations
Normally, the IRS must assess tax, or file suit against the taxpayer to collect the tax, within three years after the return is filed. The three-year period of limitation on assessment also applies to penalties. The statute increased to four years if you omit 25% of your gross income. There is no statute for fraudulent returns. The statute never runs out and you can be audited anytime.
When the statute runs
The statute of limitations on assessment begins to run on the day after you file your return. Thus, the day of filing is excluded from the computation of the three-year period. For example, taxpayers who filed their 2012 Form 1040 on 4/17/13 are free and clear after 4/15/16 as the IRS can’t assess a deficiency after that date. A return filed early is considered filed on the due date of the return. A return filed after the original due date, is considered filed on the date the return is actually received by the IRS. Extending the due date of the return does not shorten the assessment period.
Example 1: Statute of limitations for individual income tax Form 1040:
If you filed your 2010 Form 1040 return on 3/5/11, the return was deemed filed on 4/15/11, and thus, the IRS can’t assess a tax deficiency after 4/15/14. If the return was extended to 10/15/11, and was filed on that date, the period of assessment would run from 10/15/11 to 10/15/14.
If you filed your 2008 Form 1040 return on 4/15/09, the federal statute runs out on 4/15/12. Add two years if you omitted 25% of your income. California has a 4-year stature so the state has until 4/15/13 to audit your 2008 tax return.
Example 2: Statute of limitations for quarterly federal payroll tax returns:
If your corporation timely filed its quarterly federal payroll tax return Form 941s for the four quarters of 2011 on 4/30/11, 7/31/11, 10/31/11, and 1/31/12, all four returns were deemed filed on 4/17/12, which means that the IRS has until 4/15/15, to assess a tax deficiency for any of the four quarters.
Example3: Statute of limitations for unemployment tax return (FUTA) Form 940:
Employer’s annual federal unemployment tax return (FUTA) Form 940 doesn’t fall under this rule even though it is an employment tax return. The statute of limitations expires three years after the filing deadline on 1/31/15, not 4/15/14.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.
