When Does the Statute of Limitations Run Out for IRS Tax Audits?

A visitor to my website found it by asking this question in a search on Yahoo: “When does the statute of limitations run out for audits?”

The shortest answer is three years.

So the IRS Has Three Years – Three Years Starting When?

But that’s not quite enough information all by itself. The first, next question is: three years from what? What event makes the clock start ticking and counting down?

The shortest answer is that the clock starts counting down, when you, the taxpayer, file your tax return. But that’s not quite the whole story either:

The clock starts ticking upon filing when you file on the due date (like April 15th) or later. But, the clock does not start ticking if you file your return early. For example, if you filed your tax return on March 15th, a month before the day that’s so big on everyone’s mind, April 15th or “Tax Day” as some now call it.

Instead, if you file your tax return early, again, say on March 15th, the IRS will say ‘thank you very much,’ but the statute of limitations clock won’t start ticking until the due date, April 15th.

This is one of those things that puts the rules of taxes into a sort of bizarro-world (many would say one of many!).

The IRS Wants it Bad!

This early filing rule is a little strange because it seems to convlict with the IRS’s desire for taxpayers to file their tax returns. We know that the IRS wants taxpayers to file their tax returns, and, if a bureaucracy could have and express emotions, you could say that the IRS wants this badly. Really wants it. Really wants taxpayers to prepare and file their tax returns.

Yet, however bad the IRS wants it, the tax system’s rule that filing early doesn’t start the clock ticking discourages taxpayers from filing – or at least from filing early, and that seems just a little bit bizarre.

This rule discourages early filing because who wants to give the IRS a free ride? Who wants to give it even more time to decide whether to do things that can make your life difficult? And so, this rule seems to be at odds with the IRS’s strong desire to have taxpayers actually file their returns, though there are a few arguably reasonable reasons for having the rules set up this way.

Still, one would think that the IRS would be inviting and encouraging taxpayers to get their taxes filed, at all, on time, even early, and would add a few carrots to the bundle of sticks it brandishes at those who file late or not at all.

How Do We Know That the IRS Wants It Bad?

Just look at their rules! The IRS charges heavy penalties plus interest for filing late and for not filing at all. By doing this, the government punishes late-filers and non-filers by making it expensive.

And, more than making it expensive, if you ever want to make any kind of arrangement to resolve a tax problem, like if you wanted to set up a payment plan, or an offer-in-compromise or even to be put into “uncollectible status,” the first thing the IRS will insist on is that you get your unfiled tax returns filed.

Like Blofeld, Goldfinger, Largo, and so many other James Bond villains, the IRS says to taxpayers with unfiled returns, “No deals, Mr. Bond.”

Plus, if you want to try to get all or even some of your taxes discharged in bankruptcy, you must have filed your tax returns.

Filing your tax returns is one of five necessary elements to wiping out tax debts in bankruptcy. Again, without filing your tax returns, the Bankruptcy Court will be required by law to say, “No deals, Mr. Bond.”

No filed tax return = no discharge in bankruptcy.

So, does the IRS want it bad or what?

One more example: Hollywood movie star and convicted tax criminal Wesley Snipes: He has been sentenced to spend years in federal prison for committing the crime (yes, crime) – in fact, felony – of not filing tax returns.

Looking at these bunch of rules, let there be no doubt or dispute – the government wants us to file our tax returns, and has created a whole bunch of carrots and sticks (mostly sticks) to get us to do it.

Considering how badly the IRS wants taxpayers to file their tax returns, and to do so on time, you’d think they’d give taxpayers a gold star or something for being so organized and diligent that they filed early. But that just isn’t how it works.

With all the rules that articulate and carry out the government’s policies, it seems bizarro, but it is nonetheless true, that if you file your tax return early, not only do you not get a carrot, but in a way, you get a stick.

Because not only does the clock not start until the final due date for filing your tax return, but essentially, you are giving the IRS an automatic extension of its statute of limitations to decide what to do – whether to accept your return as correct and assess your tax bill based on what you submitted, or stop to wonder if there’s something wrong, and make your life more difficult by deciding to so examine – or audit – your return, and then assess your tax bill.

Conclusion: Three Years or More, Depending

To summarize: The IRS has three years to assess tax after you file your tax return. This time limit includes conducting an audit to examine the accuracy of a tax return and then assess tax after the audit.

The three-year statute of limitations starts with the date of filing a tax return if it was filed on the due date (like April 15th) or after the due date. If filed early, then the statute of limitations does not start to run until the actual due date for filing the return.

There are additional traps though: in some situations, the three-year statute of limitations never starts to run and so the IRS has an unlimited amount of time to audit and assess tax. I’ll take that up in another post. Stay tuned.

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