Generally, Section 6501(a) prohibits the IRS from auditing a tax return and assessing additional tax after three years from the filing date. Thus, the IRS has only those three years to initiate and conclude an audit and assess additional tax. In some circumstances, however, the statute of limitations extends for longer periods. Moreover, the filing date is not always the starting point for applying the statute of limitations.

Section 6501(b)(1) provides when a tax return is filed before the due date, the return is treated as if it were filed on the due date in applying the statute of limitations. Additionally, Section 6501(b)(2) provides certain employment and withholding tax returns filed before April 15 of the year following the tax year to which they apply are treated as filed on April 15 of such year.

Section 6501(c) states three circumstances that extend the statute of limitations indefinitely. They are (i) where a false or fraudulent return is filed, (ii) where the taxpayer demonstrates a willful attempt to defeat or evade tax, and (iii) where no return is ever filed. The most common of those three is where no return is filed. The IRS is not restricted by the statute of limitations from auditing tax periods for which a return was never filed.

Often the IRS cannot complete an audit before the expiration of the applicable statute of limitations. In those cases, the IRS requests an extension of the statute by agreement between the taxpayer and the IRS pursuant to Section 6501(c)(4). Where the taxpayer refuses, the IRS will generally make an assessment before the audit is fully concluded.

Another exception to the general three-year statute of limitations is in Section 6501(e)(1). It extends the statute to six years where a taxpayer omits on its income tax return either (i) 25 percent of the amount of gross income stated on the return or (ii) income related to certain foreign financial assets in excess of $5,000. Thus, a taxpayer attempting to avoid the indefinite statute of limitations by filing a tax return that significantly understates the correct gross income cannot take advantage of the normal three-year statute of limitations. Instead, the IRS will have six years to review the return, initiate an audit, and potentially assess additional tax.

John G. Hodnette is an attorney with Johnston, Allison & Hord in Charlotte.

July 14, 2023/by TAX