Monday, September 5, 2011

More about that statute of limitations

At our first class meeting, I mentioned that taxpayers sometimes dig themselves a deep hole with their tax liabilities.  Sometimes they'll owe a decade or more of back taxes to the government.  When the IRS finally gets around to coming after them for it, the tax ruins them financially.

In response to a question, I added that there was a general three-year statute of limitations for the IRS assessing tax deficiencies -- extended to six years if the taxpayer omits a substantial amount of gross income from his or her tax return (as opposed to claiming improper deductions).  But how can the taxpayer be on the hook for more than six years' worth of income taxes?

It's easy to understand once you see how the statute of limitations (Code section 6501(a)) works.  The time for the IRS to assess income tax against the taxpayer generally runs for "3 years after the return was filed."  Therefore, if a taxpayer doesn't file a return, the statute doesn't even begin to run.  This is confirmed by Code section 6501(c)(3).

And as was also mentioned in class, if the taxpayer files a false or fraudulent return with the intent to evade tax, the tax due on that return may assessed against the taxpayer "at any time" -- that is, the statute never runs.  See Code section 6501(c)(1).

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