Question

Summarize with at least 5 sentences the statute of limitations for unpaid taxes due to lateness, arithmetic error and fraud. What are the fines assessed for noncompliance? When do fines get so excessive that it requires a hearing in Tax Court?

Answer 1

A statute of limitations (SOL) is federal or state law that limits the period allowed to file legal proceedings. With regards to the collection of Federal tax debt, this refers to the IRS statute of limitations on collection. It is the time-period the IRS has to collect on taxes owed.

When taxes have not been filed by the due date and taxes are owed, the can lead to the IRS charging some of the steepest tax penalties. The penalty that the IRS charges for unfiled taxes with a balance due is called the failure-to-file tax penalty. The failure to file penalty is usually charged at a rate of 5% of the tax amount owed each month with a maximum penalty of 25% of the total tax amount owed. If the tax return is filed 60 days or more after the due date (or extended due date), the minimum penalty that is due is the smaller of $135 or 100% of the tax liability amount.

If taxes remain unfiled, the IRS and many states will file a substitute tax return on the behalf of the taxpayer in order to assess tax liability and penalties. In most situations, the amount assessed will be greater with a substitute return than if the taxpayer filed themselves because deductions and credits will be limited. The higher the assessed tax liability, the greater the tax penalties will be.

When you are called for an audit, you have two choices: you can agree with the IRS or disagree. If you agree, the case is over. If you disagree, the IRS sends you a "notice of deficiency" (also called a 90-day Letter), stating the adjustments that the Service wants to make to your tax return. You have 90 days to file a petition with the Tax Court. If you don't file within 90 days, you have agreed with the IRS.