Question

What is the concept of the statute of limitations? When does the limitation period for tax returns expire? What are the four exceptions? What other issues are involved?

Answer 1

Statute of limitations is a law which sets the limit of the maximum time available to an affected party to take legal action against a damage or injury or alleged offense.In general, the length of time allowed under a statute of limitations differes depending upon the severity of the offense.

The limitation period for tax returns expire after 3 years from the date of the original deadline of the tax return to claim any tax refund or two years from the date the tax was actually paid, whichever is later.

The four exceptions to the limitation period are:

• Taxpayers have up to seven years to claim a refund resulting from deductions for bad debt or worthless securities.
• The three-year statute of limitations does not apply in situations where taxpayers are unable to manage their financial affairs due to physical or mental impairments
• The income tax return is under audit by IRS and IRS needs more time to conduct audit
• Failure to file certain international information reporting forms such as 8938, 5471, 5472 etc.

The other issues involved are:

There are three exceptions to the three-year rule on assessments and audits:

• The IRS has six years from the date a return is filed to audit a tax return and to assess additional tax if the taxpayer omits income that amounts to more than 25 percent of that which was reported on the tax return.

• The IRS also has six years to audit a tax return and assess additional tax on income related to undisclosed foreign financial assets if the omitted income is more than $5,000.
• The statute of limitations on audits and assessing additional tax remains open indefinitely if the taxpayer files a false or fraudulent tax return.

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