Exceptions to the Statute of Limitations

The memo for each question may not exceed 2 pages.Make sure that all the citations are correct. Points will be taken off for each incorrect
citation. Use spell check and Grammatik or other such software tool to help your team
proof the memos. Imagine that a government agent is reading this or your client!
Exceptions to the Statute of Limitations
Richard is a management consultant who specializes in strategic planning for businesses.
FACTS
1.
2.
3.
4.
5.
6.
7.
8.
During the last five months of 2021, Richard had a contract to do work for a major client,
Binglebongle Manufacturing. The contract stipulated that the company would pay the
majority of his fees at the conclusion of the engagement.
On December 31, 2021 Richard and the client went to lunch. The client was very pleased
with the work Richard had done and wanted to give him a check for his services.
Because Richard had received a large amount of income in 2021, he asked the client to
mail him the check instead. He told the client that Binglebongle Manufacturing would
still get the deduction, but he himself would not have to claim the income until the next
year.
Richard received the check in early January and included the amount in his 2022
income.
In 2024 the IRS audited Richard for unreported income.
a.
Binglebongle Manufacturing had issued a Form 1099-MISC showing that
the company made the payment in 2021.
b.
Richard tried to explain to the IRS that the income was not includable on
his return until 2022, because he was a cash-basis taxpayer and did not
receive the payment until 2022.
c.
Although it took the IRS agent some time to come up with the results of
his examination, he eventually submitted an examination report that
shifted the 2022 income to 2021.
Richard felt that he had complied with the law and did not agree with the revenue agent.
a.
He filed a protest to the IRS 30-day letter and asked for an appeals
conference.
b.
Appeals agreed with the IRS agent, but Richard was not deterred.
c.
Richard went to Tax Court in May of 2026.
d.
The Court ruled that since Richard received the income in 2021, it was
taxable in that year.
Since the Court had not ruled in his favor for 2021, Richard felt that he should be able
to get a refund from the IRS for the amount that he had included in his 2022 income.
a.
He filed Form 843, Claim for Refund and Request for Abatement.
b.
The IRS denied the claim request because the statute of limitations had
expired on the 2022 tax return.
Richard was frustrated with what appeared to be an inconsistency in the tax law. He
contacted a CPA, who told him that the IRS was correct: When Richard filed his claim
in May of 2026, the 2022 tax-year statute of limitations expiration date of April 15th
had already passed.
You are to write a memorandum to answer questions, no more than 2 pages.
QUESTIONS
1.
In determining if this taxpayer is entitled to a refund based on the facts in this case,
what code section(s) apply to the determination?
2.
What do these code sections provide?
3.
Are there tests that have to be met? If so what are they?
4.
Does Richard meet them, and will he win? What is the support for your answer?
Tax Research Memo
Sample Format
Your Firm
Your Town and State
Date
Relevant Facts
This section should summarize the important facts of the research case. Only
include the relevant facts in a clear and concise manner.
Specific Issues
Identify the issue(s) and state the issue(s) in the form of a question.
Conclusions
Think of your conclusion as the “short” answer to your issue. The conclusion
section is the place to provide tax advice, recommend action(s) for the client to take,
or identify the need for additional information. There may not be a single “best”
alternative to the client’s issue so be sure to consider all applicable alternatives.
Support your conclusion by referencing back to the authority you discussed in the
discussion and analysis section.
Support
This section discusses the issue(s). Begin with the relevant code section(s).
Identify the code section, paraphrase what it says and then discus why it’s
important. Discussion of the relevant Treasury Regulations should follow. Identify the
regulation, paraphrase the important sections, and then address the importance of
the regulation given the facts.
The
discussion
should continue by
reviewing relevant Treasury
pronouncements (Revenue Rulings, Revenue Procedures, Letter Rulings, etc.) and
cases. Be sure to include complete cite for each authority. Summarize the important
facts for the pronouncement/case and then compare the facts of the
pronouncement/case to the research facts. Discuss how the facts are similar or
different. Explain how each ruling or case supports or weakens the clients’ position.
Documentation is a very important part communicating tax research and all
statements or opinions should be substantiated with supporting cites. Supporting
cites should be to primary sources only except in rare or unusual situations.
Statute of
Limitations
WEEK 2, PART 2
What is a statute of limitations?
A statute of limitations is a time period established by law to review, analyze and resolve
taxpayer and/or IRS tax-related issues. The Internal Revenue Code (IRC) requires that the IRS will
assess, refund, credit, and collect taxes within specific time limits.
IRS website https://www.irs.gov/irm/part25/irm_25-006-001r#idm140371396536176
There are three statutes that apply to
taxpayers:
The assessment statute: The
assessment statute expiration date
(ASED) is the time period the IRS has
to charge you additional taxes on a
given tax year. The ASED is generally
three years after you file the return.
The refund statute: The refund
statute expiration date (RSED) is the
last day you can request a refund.
You can request a refund if you filed
a claim within three years of the due
date of the return (including
extensions) or two years after you
paid the tax, whichever is later.
The collection statute: The
collection statute expiration date
(CSED) is the last day that the IRS
can collect on an outstanding
balance that you owe. The CSED is
10 years from the date the IRS
assessed the taxes.
Chapter 66 IRC: four subchapters
Limitations on Assessment and Collection (subchapter A)
• §6501:General statute of limitations on assessment and collection and exceptions
• §6502: statute of limitations on collection after assessment
• §6503: circumstances when the statute of limitations is suspended
Limitations on Credit or Refunds (Subchapter B)
• §6511: statute of limitations on credit or refund
• §6512: statute of limitations in the Tax Court
• §6513: time when the return is considered filed and the taxes paid for purposes of the running of the statute of limitations
• §6514: effect of the statute of limitations on IRS’ authority to grant a credit or refund
Mitigation of Effect of Period of Limitations (Subchapter C)
Periods of Limitations in Judicial Proceedings (Subchapter D)
• §6531: in criminal prosecutions
• §6532: TP litigation
Statute of Limitations Chart for Tax Returns
For Assessment under §6501
IRM 25.6.1.6.4
https://www.irs.gov/irm/part25/irm_25-006001r#idm140371396753952
What question does the statute of
limitations for assessment answer?
When is it too late for the IRS to notify a taxpayer that an
additional tax is due and owing?
The answer to the question depends on whether and when a
return was filed (or deemed filed), the types of errors or
omissions on the return, and the taxpayer’s intent in filing
the return (ie; did the tp intend to evade tax).
The return filed by the taxpayer is the general starting point
for the processes in the system. § 6201(a)(1): The IRS can
assess immediately tax reported due on the return.
Audit and Assessment (ASED):
Specific Rules
General Rule: The IRS Typically Has Three Years to Assess the Tax. The overarching federal tax
statute of limitations runs three years after the return is filed. It must meet the requirements of
a return for the SL to begin to run otherwise it is open. For example, if the TP fails to sign the
return, the IRS does not consider it a valid tax return. That means the three years can never start
to run!!!
If the return is due April 15, but is filed early, the statute runs exactly three years after
the due date, not the filing date.
If there is a filing extension to October 15, the statute runs three years from Oct. 15.
If the return is filed late without an extension, the statute runs three years following the actual
(late) filing date.
There are exceptions to this rule!!!!
Exceptions: 6 Year Rules
Six Years for Large Understatements of Income. The statute of limitations is six years if the return includes a
“substantial understatement of income.” Generally, this means that the TP underreported more than 25% of gross
income. Suppose that TP earned $200,000 but only reported $140,000. Given the omission of more than 25%, TP can
be audited for up to six years.
The TP may argue that the understatement was unintentional or that the extra income was not the TP’s income.
Nonetheless, the six-year statute applies. Remember, the IRS could argue that the omission was fraudulent. If so, the
IRS gets an unlimited number of years to audit.
An exception to the exception: The six-year statute of limitations does not apply if the underpayment of tax was due
to the overstatement of deductions or credits.
Six Years for Basis Overstatements. The IRS has argued in court that other items on a tax return that have
the effect of more than a 25-percent understatement of gross income allows the IRS an extra three years. There was
litigation for years over what it means to omit income from your return. Taxpayers and some courts said “omit”
means to leave off, as in do not report, but the IRS said it was much broader. In U.S. v. Home Concrete & Supply,
LLC, 132 S. Ct. 1836 (2012), the Supreme Court disagreed, holding that overstating basis is not the same
as omitting income. But Congress overruled the Supreme Court and gave the IRS six years.
Example: TP sells a piece of property for $3M, claiming that the cost basis was $1.5M. In fact, the basis was only
$500,000. The effect of overstating basis was that TP paid tax on $1.5M of gain when TP should have paid tax on
$2.5M.
More Exceptions
No Return or Fraudulent Return. The IRS has no time limit if TP does not file a return or if the
IRS can prove civil or criminal fraud. If the TP alters the “penalties of perjury” language at the
bottom of the return, the tax return does not count.
Amending Tax Returns. An amended return must be filed within three years of the original filing
date. However, the amended return does not restart the IRS’s three-year audit statute.
However, where an amended tax return shows an increase in tax and is submitted within 60 days
before the three-year statute runs, the IRS has only 60 days after it receives the amended return
to make an assessment. (This narrow window can present planning opportunities). In contrast,
an amended return that does not report a net increase in tax does not trigger an extension of
the statute.
More Exceptions: 18 Month Rules
Taxpayer Request for Prompt Assessment in two situations
§ 301.6501(d)-1 Request for prompt assessment.
(a) Except as otherwise provided in section 6501 (c), (e), or (f), any tax for which a return is required and
for which:
(1) A decedent or an estate of a decedent may be liable [for the tax], other than the estate tax imposed by
chapter 11 of the Code, or
(2) A corporation which is contemplating dissolution, is in the process of dissolution, or has been
dissolved, may be liable, shall be assessed, or a proceeding in court without assessment for the collection
of such tax shall be begun, within 18 months after the receipt of a written request for prompt assessment
thereof.
Collection: 10 Year Rules (CSED)
Each tax assessment has a Collection Statute Expiration Date (CSED). Internal Revenue Code section
6502 provides that the length of the period for collection after assessment of a tax liability, plus
penalties and interest, is 10 years. The collection statute expiration ends the government’s right to
pursue collection of a liability.
This is 10 years from the date of the assessment, not 10 years from the due date of the return.
Suspending the statute: In addition, this 10-year period can be suspended under certain
circumstances, including:
◦ if the taxpayer has filed for bankruptcy protection
◦ if the taxpayer resides outside of the US for at least six months
◦ if the taxpayer files a request for a collection due process hearing
◦ if the taxpayer files a claim for innocent spouse relief
◦ if the taxpayer files for an offer-in compromise (OIC) while there is a pending installment agreement request
◦ The IRS can take action to collect beyond the 10-year limitation period by filing suit to reduce the
assessments to judgment.
What does it mean to suspend the
statute?
What does this mean? The time during which the statute of limitations is suspended is not counted
toward the ten-year deadline. Why?
Because Section 6503(a)(1) provides that the statutes of limitations on assessment and collection in
respect of any “deficiency as defined in section 6211” is suspended during the period that the IRS is
“prohibited from making the assessment or from collecting by levy or a proceeding in court.”
Example: Notice of Deficiency: the statute of limitations is suspended in order to ensure that the
taxpayer is given an effective prepayment remedy in the United States Tax Court. The notice of
deficiency gives the taxpayer the right to litigate in the Tax Court before the tax is assessed and the
taxpayer is required to pay. For this reason, the notice of deficiency is sometimes called the “ticket to
the Tax Court.”
To ensure this prepayment right, Section 6213(a) prohibits the IRS from making an assessment for 90
days after the notice of deficiency is issued and, if the taxpayer petitions the Tax Court, until the
decision of the Tax Court becomes final plus 60 days.
Assessment and Collection: 13 years
Piecing assessment and collection statutes together, normally the IRS has three years to make an
assessment and ten years to collect the assessment, for a maximum of thirteen years. If the
assessment is made before the end of the three-year period, then the maximum thirteen years
will be shortened accordingly.
Claim for Refund (RSED)
§6511: A taxpayer has three years from the date of filing to claim a credit or refund, or two years
from the date the tax was paid, whichever is later. If a taxpayer files the return early or makes
payment early, the return or payment is considered filed or paid on that last day for doing so.
§6511(b): For claims for refund not filed within the three-year period, the amount of the refund is
limited to the portion of the tax that was paid within the two years preceding the filing of the
claim. Regs. Sec. 301.6511(a)-1(a)(2) provides the taxpayer must file the claim for credit or refund
of an overpayment within two years from the time the tax was paid. For example, when a
taxpayer has a temporary job and does not earn enough income to have a tax return filing
requirement but has had income taxes withheld, if the taxpayer elects not to file a tax return for
that year, he or she must file a claim for a refund within two years of the date the return would
have been due.
Overpayments may not be refunded or credited after expiration of the statute of limitations for
refund, unless the taxpayer filed a timely claim for refund and, if the claim is denied, filed a timely
suit for refund.
Exceptions
§ 6511(d) provides the following exceptions:
• A special seven-year statute of limitations for claims for refund related to bad debts and
worthless securities.
• a ten-year period for claiming refunds related to foreign tax credits.
• the carryback of net operating losses (NOLs) and capital loss carrybacks in which case the
three-year period is measured not from the year to which the losses are carried but from the
year that generated the losses that are carried back.
Constructive Overpayment
Example: On April 15 of Year 02, T timely files his tax return for Year 01 showing a tax liability of
$1,000. T has, however, underreported his tax liability by $100 and therefore really owes an
additional $100. The statute of limitations for the IRS to assess the additional tax liability expires on
April 15 of Year 05. (Assume no exception to the three-year statute on assessment applies.) The IRS
timely audits the taxpayer but does not send the notice of deficiency until February 1 of Year 06. The
taxpayer does not file a timely petition in the Tax Court to have the notice of deficiency declared
invalid because outside the assessment statute of limitations. On June 1 of Year 06, the IRS assesses
the tax. Based on the rules for assessment, the assessment is untimely. The taxpayer pays on July 1 of
Year 06.
Two related questions: (1) has the taxpayer made an overpayment and (2) can the taxpayer now claim
a refund of the taxes paid pursuant to the assessment? The answer is yes to both questions.
It may seem counterintuitive to say that the taxpayer has made an overpayment of taxes he
admittedly owed. The statute creates a constructive overpayment as the mechanism to ensure that
the statute of limitations on assessments works; the constructive overpayment thus gives the
taxpayer the refund mechanism to get the untimely assessed taxes back. A refund requires that the
taxpayer have overpaid his tax; this constructive overpayment permits the tax payment to be
refunded.
Waiving the Defense
It is a defense that can be waived. Thus, if the taxpayer pays and does not file a timely claim for
refund, the IRS can keep the tax paid because the statute does not allow the refund to be made.
The claim for refund must be filed before the taxpayer may recover the claim for refund. The IRS
may voluntarily make a refund payment without a claim for refund, and often does in a situation
where it conducts an audit and determines an overpayment. But a taxpayer wanting to preserve
the right to force the IRS to refund must make sure that a timely claim for refund is filed.
Statute of Limitations on Filing a Claim for Refund Suit:
Two years from the date of denial
The suit for refund may be brought only after the IRS has denied the claim for refund or the
claim for refund has been filed for six months without IRS action.
If the claim is denied, the suit for refund must be filed–timely mailing will not work–within two
years from the date of the notice of disallowance of the claim. §6532(a)(1).
The taxpayer cannot obtain a new refund suit statute of limitations by filing a second claim for
refund asserting the same claim as in the first.
It is unclear but it appears that the taxpayer who has not received notice has an indefinite
period in which to file suit for refund.
Mitigation Provisions
The mitigation provisions (§§ 1311 – 1314) of the Code mitigate the effect of the statute of
limitations that might preclude correction of errors. These provisions allow for correction of the
error where an action is barred by the statute of limitations for the year in which the error
occurred.
Legislative history: “The purpose of the statute of limitations to prevent the litigation of stale
claims is fully recognized and approved. But it was never intended to sanction active exploitation
by the beneficiary of the statutory bar, of opportunities only open to him if he assumes a
position diametrically opposed to that taken prior to the running of the statute. Legislation has
long been needed to supplement equitable principles applied by the courts and to check the
growing volume of litigation by taking the profit out of inconsistency, whether exhibited by
taxpayers or revenue officials and whether fortuitous or the result of design.”
What is the duty of consistency?
Gamesmanship
The Tax Court has described the duty of consistency:
The “duty of consistency”, sometimes referred to as quasi-estoppel, is an equitable doctrine that
Federal courts historically have applied in appropriate cases to prevent unfair tax
gamesmanship. The duty of consistency doctrine “is based on the theory that the taxpayer owes
the Commissioner the duty to be consistent in the tax treatment of items and will not be
permitted to benefit from the taxpayer’s own prior error or omission.”
It prevents a taxpayer from taking one position on one tax return and a contrary position on a
subsequent return after the limitations period has run for the earlier year. If the duty of
consistency applies, a taxpayer who is gaining Federal tax benefits on the basis of a
representation is estopped from taking a contrary return position in order to avoid taxes.
It also applies to unfair gamesmanship by the IRS as well.
Mechanics of Mitigation
The goal of the mitigation provisions is to leave the parties in as near as possible the position
they would have been in if the item had been properly treated through the years. The party
invoking mitigation bears the burden of establishing the following requirements:
(1) there must be a “determination” as defined by Code Sec. 1313(a);
(2) the “determination” must be a specified circumstance of adjustment listed in Code Sec.
1312; and
(3) the party against whom the mitigation provisions are being invoked has maintained a
position inconsistent with the challenged erroneous inclusion, exclusion, recognition, or
nonrecognition of income.
§ 1311.
Correction of error
§ 1312.
Circumstances of
adjustment
§ 1313. Definitions
/
§ 1314. Amount
and method of
adjustment
https://www.law.cornell
.edu/uscode/text/26/su
btitle-A/chapter1/subchapter-Q/part-II
Links to Mitigation provisions
Problem example: Double Inclusion of Same Item of Income
A taxpayer includes income on a tax return for Year 01, paying the resulting Year 1 tax. Then,
after the statute of limitations for Year 01 has closed but the Year 05 statute is still open, the IRS
insists that the same item of income be included in Year 05.
If the IRS succeeds in forcing the taxpayer to include the item in income in Year 05, the IRS will
have realized a double benefit–a tax on the same item of income in both years.
In that case, the mitigation provisions will operate to force open the Year 01 statute of
limitations solely to allow the taxpayer to obtain a refund plus interest since Year 01.
Keep in mind the key elements of this example: the party who benefits insists on the treatment
in the correct open year after having benefitted from the same item in an incorrect but now
barred year. Relief is available by lifting the bar of the statute of limitations but only to correct
that item.
Mitigation Solution
Section 1311(a)provides that, if a “determination” (as described in § 1313(a)) is made that
creates a double benefit to the IRS (as described in § 1312, subsection (1) of which includes the
double inclusion of income) and, on the date of the determination the correction of the error in
the erroneous year (Year 01 in the example) is barred, the error can be corrected (as described
in § 1314) by allowing the taxpayer to file a claim for refund for Year 01.
Problem Example
If the taxpayer seeks a deduction in a correct open year (e.g., Year 05 )but has also claimed the
deduction erroneously in a barred year (Year 01), the IRS may open up Year 01 to assess and
collect additional tax for Year 01.
Extension by agreement
§ 6501(c)(4)(A): Except in the case of the estate tax, the statute of limitations on assessment may be
extended by written agreement entered while the statute is still open.
The IRM lists circumstances in which a consent may properly be requested. The circumstances
include:
(a) Where the limitations period expires within 180 days and the there is insufficient time to complete
the audit in an orderly manner.
(b) A subsequent or related year(s) is under examination and there are firm indications that
substantial additional tax is due for a prior or related year and (1) the limitation period for the prior or
related year will expire within 180 days, and (2) there is insufficient time to complete the examination
and administrative processing of the case.
(c) The limitation period for the return under examination will expire within 180 days and the
taxpayer has requested an Appeals hearing.
(d) A joint civil and criminal investigation with CID is in progress and there is danger of an expiration
of the statutory period of assessment.
Types of Extension §6501(c)(4)
Regular or Fixed Date consent:
◦ Form 872
◦ Extends the statute to a specific date
◦ Neither party can terminate the agreement before that date
◦ The IRS must file a notice of deficiency on or before that date
Special or Open-ended consent:
◦ Form 872-A
◦ Keeps the limitation period open for up to 10 years
◦ Either party can terminate the special consent by filing Form 872-T
◦ The IRS must file a notice of deficiency within 90 days of termination
Voluntary Consent
Taxpayers are not obligated to enter an extension agreement. The IRS is required to notify
taxpayers that they have a right to refuse to enter such an agreement with the IRS each time the
IRS requests such an extension.
The consent must be voluntary!!!
The consent must have been voluntary, meaning that the taxpayer signing the consent must
have signed without fraud, trickery or duress. But, merely signing under threat – real or
perceived– that the IRS may take some lawful action in order to protect its interests (such as
prompt assessments taking protective positions) is not duress that will avoid an otherwise
validly executed consent.
Is it a good idea to agree to extend the statute?
If the taxpayer refuses to execute a consent form, the IRS may simply issue a notice of deficiency
which will force the taxpayer either to pay the disputed amount or file a Tax Court petition
within 90 days of notice.
What else can happen?
The author disagrees with me! “My view is that, generally, a taxpayer should not agree to any
extension. If unusual circumstances exist that might motivate the taxpayer to agree to an
extension, the taxpayer should keep a tight leash on the extensions, agreeing to only such
extensions as absolutely needed.”
Impact of a Criminal Conviction on the
Statute of Limitations
If the taxpayer has been convicted of criminal tax evasion
under § 7201, the conviction will be preclusive on the issue of
fraud to establish the unlimited statute of limitations in
§ 6501(c)(1)(as well as the civil fraud penalty in § 6663).
Statute of
Limitations
for
Prosecuting a
Criminal Tax
Case
QUESTIONS
STATUTE OF
LIMITATIONS
FOR EACH OF THE QUESTIONS
PROVIDE THE BEST ANSWER
REVD 102421
SOL
ASSESSMENT
AND
COLLECTION
Why is it necessary
to have a statute of
limitations on
assessment and
collection of taxes?
2
Why is it
necessary to have
a statute of
limitations on
assessment and
collection of
income tax?
Prevents an open-ended issue for both
taxpayers and the IRS.
The Supreme Court observed1 that “a
statute of limitations is an almost
indispensable element of fairness as well
as of practical administration of income
tax policy.” This is certainly true, as a
good general observation, but there are
instances where an unlimited statute of
limitation applies.
1Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946),
3
General SOL
ASSESSMENT
What is the general
period of limitations
on assessment of
income tax?
4
What is the
general period of
limitations on
assessment of
income tax?
The general rule is that the IRS may
assess additional taxes within 3
years of the date the return is filed
or due, whichever is later. § 6501(a).
5
Explain whether
the filing of returns
in the following
situation begins
the statute of
limitations on
assessment.
Joe Johnson files his return in
a timely manner but does not
sign it.
6
Explain whether the filing of returns in
the following situation begins the
statute of limitations on assessment.
Joe Johnson files his
return in a timely
manner, but does
not sign it.
A taxpayer is required to sign the return
in order to start the statute of limitations
IRC §6061 and Reg. §1.606-1. A return
that is filed without signing will not start
the SOL.
7
Explain whether the filing
of returns in the following
situation begins or
restarts the statute of
limitations on
assessment.
Candy Apple files an amended
return approximately one year
after she filed her original
return.
8
Explain whether the filing of returns in
the following situation begins or
restarts the statute of limitations on
assessment.
Candy Apple files an
amended return
approximately one
year after she filed her
original return.
The normal 3-year statute
generally applies.
What do you think would
happen if an amended return
was filed the day before the 3
year statute was set to expire?
9
Explain whether the filing
of returns in the following
situation begins the
statute of limitations on
assessment.
Tommy Gunn files a trust return
(Form 1041) in a timely manner.
Unfortunately for him, his
organization is later held to be a
corporation that should have filed
Form 1120.
10
Explain whether the filing of returns in
the following situation begins the
statute of limitations on assessment.
Tommy Gunn files a trust
return (Form 1041) in a
timely manner.
Unfortunately for him, his
organization is later held to
be a corporation that
should have filed Form
1120.
If done in good faith the statue may
nonetheless start. See the Supreme
Court case in Germantown Trust & Co. v.
Comm’r, 309 US 304, 308 (1940). Of
course the return filed must meet the
criteria to be considered a sufficient and
complete return.
11
Explain whether the
filing of returns in the
following situation
begins the statute of
limitations on
assessment.
Elliot Shaft files his individual tax
return on April 20.
12
Explain whether the filing of returns in
the following situation begins the
statute of limitations on assessment.
Elliot Shaft files his
individual tax return on
April 20.
The statute starts after the return is filed.
Absent an extension the return is delinquent.
13
RUNNING OF THE
STATUTE WHEN
ORIGINAL RETURN IS
FRAUDULENT AND
DOES AMENDED
RETURN CURE?
Fred Fraud timely filed his 2015 return with
many fabricated deductions and credits. In
2017, Fred could no longer bear the guilt of
having filed a fraudulent return, and he filed
an amended return correcting the
fabrications on the original return. In 2022,
the IRS assessed additional tax on Fred for
the 2015 tax year. Has the statute of
limitations run on the 2015 return, barring
the IRS from assessing additional tax?
14
Fred Fraud timely filed his
2014 return with many
fabricated deductions and
credits. In 2016, Fred
could no longer bear the
guilt of having filed a
fraudulent return, and he
filed an amended return
correcting the fabrications
on the original return. In
2021, the IRS assessed
additional tax on Fred for
the 2014 tax year. Has the
statute of limitations run
on the 2014 return,
barring the IRS from
assessing additional tax?
You cannot cure a fraudulent return by filing an amended return.
Consequently, There is no statute of limitations if the taxpayer
either files a false return with the intent to evade tax or, in the
case of tax other than income tax or estate tax, willfully attempts
in any other manner to defeat or evade tax. §§ 6501(c)(1) and
(c)(2).
See Badaracco (pp. 122 ff.) where the Supreme Court held that a
subsequently filed nonfraudulent amended return does not avoid
the unlimited statute of limitations for an original fraudulent
return.
15
Exceptions to the
three-year general
rule
Name and describe five
categories of exceptions (or
as many as you can name)
to the three-year general
rule for the statute of
limitations on assessment.
16
Name and describe five
categories of exceptions
(or as many as you can
name) to the three-year
general rule for the
statute of limitations on
assessment.
1.
Assessments that may be made at any time. No return filed,
false or fraudulent return, an incomplete return.
2.
Assessments that may be made within 6 years. More than
25% understatement of Gross Income.
3.
Assessments that must be made within 18 months. Request
for prompt assessment.
4.
Assessment periods extended by agreement. 872, etc.
5.
Assessments affected by carrybacks from an excess loss or
credit year to an earlier year. Statutory period for prior
period remains open until the expiration of the statute period
for the year of loss or credit.
17
In each case, when
does the SOL expire?
Frannie Smithe timely files her return on
April 15, 20X1, stating that her income is
$60,000. Her actual income is $100,000.
18
When does the SOL
expire?
Frannie Smithe timely
files her return on April
15, 20X1, stating that
her income is $60,000.
Her actual income is
$100,000.
April 15, 20X7 (IRC §§ 6501(e)(1)-6501(e)(3).
19
In each case, when
does the SOL expire?
Bob Unbanks has not filed a return
for the past five years, because he
does not believe the government is
working for him.
20
In each case, when does the SOL
expire?
Bob Unbanks has not
filed a return for the past
five years, because he
does not believe the
government is working
for him.
Never.
21
In each case, when
does the SOL expire?
A taxpayer undergoing an audit signs a
Form 872, Consent to Extend the Time to
Assess Income Tax, and agrees to extend
the period of limitations for another six
months.
22
In each case, when does the SOL
expire?
A taxpayer undergoing an
audit signs a Form 872,
Consent to Extend the Time
to Assess Income Tax, and
agrees to extend the period
of limitations for another six
months.
Remaining statute plus 6 months or as
otherwise stated on the form (Form
872 and 872-A).
Why do you think you should read the
872 carefully?
23
In each case, when
does the SOL expire?
ZEEE Company under the CARES act
carries back a net operating loss
(NOL) to its fifth prior tax year by
filing an amended return for the
carryback year.
24
In each case, when does the SOL expire?
ZEEE Company carries
back a net operating loss
(NOL) to its third prior
tax year by filing an
amended return for the
carryback year.
In the case of a carryback of net
operating losses (NOLs) and capital loss
carrybacks the carryback period is
measured not from the year to which
the losses are carried but from the year
that generated the losses that are
carried back IRC §6501(h).
25
Overstatement
of Cost
X purchased stock for $20,000 and sold the stock for $100,000
some years later. In the year of the sale, X had $25,000 of
income from other sources and reported the stock sale. X
incorrectly but unintentionally reported that the stock sold
was purchased for $100,000, resulting in no gain or loss. What
is the statute of limitations on assessment on the tax return
reporting the stock sale?
26
X purchased stock for $20,000 and
sold the stock for $100,000 some years
later.
In the year of the sale, X had $25,000
of income from other sources and
reported the stock sale.
X incorrectly but unintentionally
reported that the stock sold was
purchased for $100,000, however,
resulting in no gain or loss.
What is the statute of limitations on
assessment on the tax return reporting
the stock sale?
Section 6501(e)(1)(A)(i) provides a six-year statute for a “substantial omission”–defined
as an omission from gross income in an amount exceeding 25% of the amount of gross
income stated in the return. An exception to this extended statute of limitations is
provided where the item “is disclosed in the return, or in a statement attached in a
manner adequate to apprise the Secretary of the nature and amount of such item.”
In this example, there is no overstatement of gross income. In Colony, Inc. v.
Commissioner, 357 U.S. 28 (1958), the Supreme Court held that the amount includable
in the denominator is the amount realized rather than the gain realized.
The Supreme Court so held in this precise type of circumstance (artificially created
basis resulting in a reduction of net gain). United States v. Home Concrete, 566 U.S. 478
(2012).
However, Congress legislatively overruled Home Concrete by amending § 6501(e)(1)(B)
to provide that “An understatement of gross income by reason of an overstatement of
unrecovered cost or other basis is an omission from gross income.” This means that, in
the foregoing calculation, the $80,000 overstatement of basis is treated as an omission
of gross income, so that the omitted income is $80,000, with a resulting gross income
omission of greater than 25% and a resulting 6-year statute of limitations.
27
Request for
Prompt
Assessment
Under what circumstances would
a taxpayer request a prompt
assessment to shorten the statute
of limitations from three years to
eighteen months?
28
Under what
circumstances
would a taxpayer
request a prompt
assessment to
shorten the statute
of limitations from
three years to
eighteen months?
A decedent’s estate may request prompt assessment
with respect to income tax returns. The assessment must
then be made within 18 months of the date of the
request.
A similar rule applies for liquidating corporations.
This shorter statute of limitations does not eliminate the
requirement that the IRS send a predicate notice of
deficiency; the timely sending of the notice of
deficiency will, of course, invoke the suspension of the
statute of limitations as discussed elsewhere.
Why do you think someone would request this? Do you think
it will increase the risk of audit?
29
What is the statute of limitations for
collecting tax assessed?
30
Pursuant to IRC §6502(a) Where the assessment of any tax imposed has been
made within the period of limitation properly applicable thereto, the tax may
be collected by levy or by a proceeding in court, but only if the levy is made or
the proceeding begun within 10 years after the assessment of tax.
What is the statute
of limitations for
collecting tax
assessed?
For collections, in considering these maximum periods, you must also factor
in those circumstances which might cause a valid assessment to be made
beyond the three-year period. These include:
1.
An extended or no statute of limitations on assessment (e.g., failure to
file, fraud and six-year statute),
2.
Suspensions of the statute of limitations on assessment when the IRS
issues a notice of deficiency, and extensions of the statute of limitations
upon mutual written consent.
Thus, it is not unusual for the assessments (even where there is no substantial
omission or fraud) to be made five or six years or even longer after the return
was filed.
Then, upon assessment, the IRS will have ten years after assessment to collect
the tax.
31
What is the applicable
statute of limitations in
each of the following
independent situation?
1.No return was filed by the taxpayer..
2. A corporation is determined to have been a
personal holding company for the year in question.
The return filed failed to indicate the company was
a PHC.
32
What is the applicable statute of limitations in each of the
following independent situation?
1. No return was filed by
the taxpayer..
1. Unlimited.
2. A corporation is
determined to have been a
personal holding company
for the year in question.
2. The return will likely not be deemed
sufficient to start the SOL. See Lane –
Wells, Co., 321 U.S. 219, 223 (1944).
33
What is the applicable
statute of limitations in
each of the following
independent situation?
3. In 20X1 , V incurred a bad-debt loss
that she failed to claim.
34
What is the applicable
statute of limitations in
each of the following
independent situation?
3. In 20X1 , V incurred a
bad-debt loss that she
failed to claim.
3.Normal 3-year statute.
35
What is the applicable
statute of limitations in
each of the following
independent situation?
4. On his 20X1 return, a taxpayer
inadvertently omitted a large
amount of gross income.
5. Assume the same situation as that in
situation 5, except that the omission
was deliberate.
6. For 20X1, a taxpayer innocently
overstated her deductions by a large
amount.
36
What is the applicable statute of limitations in
each of the following independent situation?
5. On his 20X1 return, a
taxpayer inadvertently
omitted a large amount
of gross income.
6. Assume the same
situation as that in
situation 5, except that
the omission was
deliberate.
7. For 20X1, a taxpayer
innocently overstated her
deductions by a large
amount.
5. Generally, if greater than 25% then 6 years
– based on the word “inadvertent.”
6. If determined to be fraudulent then there is
no statute of limitations for assessment but
there is a 6-year statute for criminal fraud.
7. It depends. The 25% then 6 years under IRC
§6501(e)(1)(b) generally applies to
businesses. Taxable Alimony has been
considered as an omission for the 6-year
statute. If just for a deduction, then the
statute might remain 3 years.
37
ANOTHER NIGHT IN THE BIG CITY ENDS