IRS Statutes of Limitations for Tax Refunds, Audits, and Collections

One of the functions of the IRS is to ensure that taxpayers adhere to their tax liability. To that end, the IRS attempts to combat the so-called “tax gap”, an estimated gap in the nation’s total tax liability and the money the IRS is pooling together from estimated payments and withheld taxes. To reduce that tax gap, the IRS must audit taxpayers, especially those with the potential to limit or skirt their tax liability the most. But there are limits to the IRS’s power, reach, and timing. Thanks to statutes of limitations, the IRS cannot audit taxes from ten years ago nor demand that debt be owed on tax refunds from the 1990s. Understanding these limits can help taxpayers better navigate their current tax situation and redirect more useful energies to maintaining a healthy record of the past several years, knowing how far back the IRS may reach.

Understanding IRS Statutes of Limitations

A statute of limitations is a time limit imposed on any claims or actions the IRS may take against taxpayer accounts. If you’ve heard of the statute of limitations, it may have been in a legal context. For example, if a person commits a certain crime with a statute of limitations, they may not be prosecuted for that crime. Some crimes have no statutes of limitations, such as murder, famously. Tax issues are far, far less serious than a murder charge. And as such, there are fairly strict time limits imposed on the IRS (and the taxpayer) to follow through with these issues. In general, there are three significant statutes of limitations that you will want to remember:

  1. Statute of limitations on claiming a tax refund from the IRS;
  2. Statute of limitations on performing and completing a tax audit, and;
  3. Statute of limitations on collection actions against a tax debt.

Statute of Limitations on Tax Refunds

A tax refund is composed of any excess money the IRS has received from you that will not go towards your tax liability. Tax refunds can also be earned through refundable tax credits, such as the revised child tax credit or the earned income tax credit – meaning, even if your estimated payments or tax withholding was not enough to cover the entirety of your tax liability for the last year, your tax credits might have taken care of the remainder, and left a little bonus. Generally, the IRS sends any tax refunds on your account back to you as soon as possible.

Failing to do so would mean paying interest on overpayment – yes, the IRS imposes interest on its debt to you the same way interest is applied on taxpayer debts. But just because you may be potentially entitled to a tax refund does not mean that you automatically receive one. If you are eligible for a refund the IRS had not assessed, you must claim your tax refunds through IRS Form 843 or risk losing hundreds or thousands of dollars of potential money back from the IRS. Your time limit for doing so is three years from the date you filed your original tax return or two years from the date you paid the excess tax.

If you miss these deadlines, you may no longer be eligible to receive the tax credits or tax refund for that particular tax return. There are certain exceptions. If you have a tax refund due to tax deductions caused by bad debt, you have up to seven years to claim it. The statute of limitations also does not apply if you cannot take care of your financial affairs at the time due to mental or physical disability. The other two significant statutes of limitations are imposed on the IRS rather than the taxpayer.

Statute of Limitations on Tax Audits

Audits are the IRS’ way of double-checking tax accounts that are more likely to make mistakes on their taxes or lead to lost taxes. In some cases, the IRS will automatically audit more taxpayers that qualify for certain tax credits, such as the EITC, to ensure that all applicants are properly found eligible. In other cases, the IRS picks up on potential accounts to audit based on a computer algorithm that crawls through millions of tax returns and corresponding information returns from businesses, banks, and other institutions, to determine discrepancies and send out red flags. Sifting through millions of tax returns is difficult, and auditing all the ones that stand out is impossible.

This is why the IRS only performs audits sparingly – for example, only about 0.25 percent of all tax returns sent to the IRS in 2019 were subject to an audit versus about 0.9 percent in 2010. That number is slated to increase as the IRS receives more funding and agents. Still, your chances of being audited by the IRS remain relatively slim each year – and are increasingly slim if you do not fall into the top or bottom most tax brackets and review your returns carefully. For taxpayers who do find themselves on the business end of the IRS’ magnifying lens, it may be of some comfort to know that the IRS has a strict time limit for when any given tax audit must be completed.

That time limit, under most circumstances, is three years from the date your tax return is due. If you file your tax return on Tax Day 2022, the IRS has until Tax Day 2025 to complete its audit of that return. There are exceptions to this rule, as well. The IRS has up to six years from the date you filed your tax return to audit it if you omitted a substantial amount of income, at least 25 percent of your total income for that year. The IRS also has up to six years to audit your return if you have income related to undisclosed foreign assets of more than $5,000. Finally, the statute is lifted for tax fraud and other crimes, meaning the IRS can investigate your return at any time.

Statute of Limitations on Collection Actions

Last but not least, the IRS can go after a taxpayer for having a substantial tax debt, to the point that the IRS can make a legal and physical claim on the taxpayer’s income and assets if need be. Yet, despite these collection actions, the IRS limits how long it can pursue a tax debt before that debt must be resolved. This statute of limitations is ten years plus tolling periods.

Tolling periods, in this sense, are extensions levied by the IRS onto a debt timer due to uncollectibility, such as an ongoing bankruptcy case, being outside of the country for extended periods of time, or military service. The statute of limitations on tax debt also serves as a timeframe for taxpayers who cannot pay off the entirety of their tax debt but can still make monthly payments to pay off most of their debt. For these partial payment plans or potential offers in compromise, keeping the ten-year rule in mind helps.

Taxpayers cannot bury their heads in the sand for ten years and expect the IRS to disappear. The IRS’ interest in closing your case grows over time, and they can levy your home, property, assets, and paychecks to pay for your debt. If you agree you owe the IRS but can’t pay due to your current financial situation, it may place your account in currently not collectible (CNC) status. Statutes of limitations help taxpayers manage their expectations when working with the IRS and offer you more options throughout the process. However, no two cases are entirely alike.

Seeking Trusted Tax Expertise

At Rush Tax Resolution, we counsel individuals and businesses on understanding and navigating the legal complexities of tax liability, helping to negotiate with the IRS to dispute or resolve tax debt. Whether it’s an IRS audit, penalty, collection, or another tax-related issue, we have the tax professionals and expertise to meet your needs. Contact us today to learn more about Rush Tax Resolution and what we can do for you.