Statute of Limitations

IRS Restructuring and Reform Act of 1998

The issue of Statutes of Limitations can be complicated.  The RRA of 1998 made some changes to the Code.  Below are some general rules to help you understand this complex area.  Of course, the only way to know for sure the specific statute pertaining to a tax return is to have a professional analyze the IRS (or FTB) official records of your account.  Keep in mind that if you do not file a return, the statute for both examination and collection never starts running!  That is why even if the tax agency prepares a return for you (referred to as a "substitute for return" in IRS lingo), you should still file a return to start the statute of limitation running. 

There are two basic types of statutes:

1. Assessment (for making changes to your return) - either by the IRS/FTB or another tax agency,  or by you via filing an amended return or claim, and

2. Collection (the time period from the date of assessment that the IRS/FTB or another tax agency has to enforce collection of the tax. 

IRS STATUTE OF LIMITATION

The general, the IRS assessment statute is three (3) years from when a return is filed (if filed before the due date, the actual due date for the return begins the due date for the return), or two years from when the tax is paid - whichever is later.  If you have underreported 25% or more of your gross income, then the statute for assessment is open for six (6) years.  If you willfully understate your tax liability (resulting in a civil fraud penalty at 75% of the tax liability), or if you neglect or refuse to file a tax return and the IRS must file a return for you (called a substitute return), there is no statute of limitation (that is scary....).

The taxpayer and the IRS can voluntarily enter into an agreement to extend the statute for assessment - either to a specific date (usually accomplished by the taxpayer and the IRS executing Form 872 for individual and corporate taxes), or for an unlimited period of time (by executing Form 872A for individual and corporate taxes) - until either the taxpayer or IRS elects to terminate the statute to a date 90 days following delivery of a Form 872-T to the IRS office handling the case.    Other statute extension forms are used for specialty areas, such as employment and excise taxes.

In either case (specific or unlimited extension), the statute extension, under certain circumstances, can be further restricted to  specific issues (this is referred to as a restricted consent).   Whether or not to agree to an extension of the statute is a serious decision, and should not be made without the advice of a tax professional. 

The collection statute can only  be extended by agreement between the taxpayer and the IRS for two specific situations (discussed below).  However, certain types of actions will automatically extend the statute for assessment and collection (e.g., an Offer in Compromise which suspends the statute while it is being considered by the IRS, and bankruptcy - which suspends the running of the statute for the period from filing the petition to discharge, plus six months). 

While an uncommon practice, the IRS can file a motion in District Court to obtain a judgment against the taxpayer, which extends the collection statute for another 10 years.  An excerpt from a 2004 District Court case appears at the end of this page as an illustration of the judgment process

Following is an excerpt from the Act that discusses the extension process:

RRA 3461 - Procedures for Extension of the IRS Statute of Limitations by Agreement

Section 3461

B. Background: Section 6501 of the Internal Revenue Code generally provides that the Service has three years from the date a return is filed to assess additional taxes. Section 6502 generally provides that the Service has ten years from the date of assessment to collect the tax. Prior to the expiration of the limitations period provided by these provisions, the law provided that the taxpayer and the Service could agree in writing to extend the statute of limitations. Congress believed that many taxpayers were not being informed of their rights to refuse to extend the statute of limitations on assessment or to limit the scope of any such extension. In addition, Congress believed that all taxes should be collected within the 10 year statute and that the statute should not be extended.

C. Change(s): The authority to extend the collection statute of limitations by agreement ended on December 31, 1999. Any extension of the collection statute already in effect on December 31, 1999,  expired on December 31, 2002. An exception to this section was provided for extensions related to installment agreements. An extension of the collection statute entered into in conjunction with the acceptance of an installment agreement should be for the period necessary to satisfy the tax liability via the agreement. The legislation provides that the period of limitations for extensions related to installment agreements expired 90 days after the end of the extension period.

The legislation also requires that taxpayers be advised/notified of their right to refuse to extend the statute of limitations on assessment or in the alternative to limit an extension on the assessment statute to particular issues or for specific periods of time, each time that the Service requests that the taxpayer extend the limitations period.

D. Impact

Because the Service will have to complete collection actions within the 10 year statute in most cases, collection contacts and actions will have to be initiated sooner.  Although this is true in general, it is especially true for cases where the collection statute will expire within the next 2 years and for cases where the original collection statute has been extended beyond December 31, 2002.

 Although the statute of limitations for collection can be extended for installment agreements, the statutory waiver must be entered into at the time the installment agreement is accepted and must be for a determined period, i.e., for the period necessary to satisfy the tax liability via the agreement. The period of limitations will end on the 90th day after the end of the waiver period.

Examination personnel must provide notice to a taxpayer of his/her right to refuse to extend the statute of limitations on assessment, or to limit the scope and time of the extension each time such an extension is requested.   Whether the taxpayer is advised orally or in written form, the giving of the notice must be documented in the taxpayer’s file, each time a request for extension is sought.

Entering into an extension of the statute is serious business.  In my opinion, no taxpayer should make this decision without consulting was a tax resolution specialist.  On occasion, the IRS agent may look to extend the statute to give him or her more time to identify additional adjustments (that means more tax to be paid!).    Not extending the statute in that circumstance will usually result in the IRS issuing a Notice of Deficiency.   Once a timely petition is filed, the case can most often be resolved in the Appeals Division. 

Franchise Tax Board Statute for Examination and Collection

I've had inquiries regarding the statutes for a State of California income tax liability. Generally speaking, the FTB has a four (4) years to make a tax liability change through an audit, or for the taxpayer to file an amended return to change their prior tax liability.  However, the FTB has an unlimited statute for collection.  That will change effective July 1, 2006 when under new legislation, the statutory period for collection will be 20 years.  That is still twice as long as the IRS collection statute of 10 years.

Within 10 years of the assessment, the FTB can sue in Court and obtain a judgment against the taxpayer.  This judgment is valid for 10 years, and it can be renewed once. 

Here is a further explanation of the judgment process:

Judgment for tax. The FTB may file in the office of the county clerk in Sacramento County, or any other county, a certificate specifying the amount, due, the name and last-known address of the taxpayer liable, and the fact that the FTB has computed and levied the amount due, and request that judgment be entered for the amount due. [Cal. Rev. & Tax. Cd. § 19201 .] The county clerk then enters a judgment against the taxpayer and files the judgment in a Bank & Corporation Tax Judgments looseleaf book. [Cal. Rev. & Tax. Cd. § 19202 .] An abstract or copy of the judgment may be recorded with the county recorder. From the time of the recording, the judgment constitutes a lien on all real property of the taxpayer in the county or on property acquired by the taxpayer before the lien expires. [Cal. Rev. & Tax. Cd. § 19203 .]

The lien is effective and has the priority of a judgment lien for 10 years from the date of the recording, unless sooner released or discharged. The lien may be renewed. [Cal. Rev. & Tax. Cd. § 19204 .] The Franchise Tax Board may release all or any portion of the lien if it determines that the taxes are sufficiently secured by a lien on other property of the taxpayer or that such release will not jeopardize the collection of the tax or if the lien is legally unenforceable. [Cal. Rev. & Tax. Cd. § 19206 ; Cal. Rev. & Tax. Cd. § 19207 .]

The judgment may be executed in the same manner as executions may issue on other judgments and sales shall be held under execution as prescribed in the Code of Civil Procedure. [Cal. Rev. & Tax. Cd. § 19205 .]

In looking at the discussion that proceeded the passage of the new State law AB 911, you get an insight into why this new legislation was enacted:

 Statute of limitations:  Current law lacks a statute of  limitations for the collection of delinquent taxpayer  accounts.  Generally, once a tax liability is due and payable, a statutory lien arises for the amount due upon a taxpayer's real and personal property.  The statutory lien exists for 10 years, but does not become unenforceable by lapse of time.  The 10-year limitation on collection is extended or suspended under a number of specified circumstances.

This bill establishes a 20-year statute of limitations on collections, beginning at the last statutory lien date for each tax year.  The liability would be extinguished at the end of the statute of limitations, abating the underlying tax. 

IRS JUDGMENT

Here is an excerpt from a 2004 District Court case where the IRS sued in Court to have its trust fund recovery penalty assessment (this is where the IRS obtains an assessment against a responsible officer, employee or other person for uncollected and/or unpaid employment or excise taxes) extended by way of a judgment:

U.S. v. MILITELLO, Cite as 93 AFTR 2d 2004-2800, 06/09/2004 , Code Sec(s) 7403

UNITED STATES OF AMERICA, PLAINTIFF v. Salvatore MILITELLO, DEFENDANT.

Case Information:

SUMMARY

Actions to reduce assessments to judgment—trust fund recovery penalty. Pursuant to stipulation, judgment was entered for govt. and against taxpayer for unpaid balance of Code Sec. 6672 trust fund recovery penalty in stated amount plus interest.

OPINION

FOR UNITED STATES OF AMERICA, PLAINTIFF, ELIZABETH LAN Trial At [pg. 2004-2801] torney, Tax Division U.S. Department of Justice Post Office Box 55 Ben Franklin Station Washington, D.C. 20044

FOR SALVATORE MILITELLO, DEFENDANT, ERWIN RUBENSTEIN Rubenstein & Isaacs 2000 Town Center, Suite 2700 Southfield, Michigan 48075-1318

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION,

STIPULATlON FOR ENTRY OF JUDGMENT

Judge: Hon. Robert H. Cleland

It is hereby stipulated and agreed that judgment may be entered in favor of the United States and against Salvatore Militello for the unpaid balance of the trust fund recovery penalty assessed against Salvatore Militello, pursuant to 26 U.S.C. § 6672, for the quarterly tax periods ending June 30, 1990, September 30, 1990, December 31, 1990, June 30, 1991, September 30, 1991, December 31, 1991, March 31, 1992, June 30, 1992, and September 30, 1992, in the amount of $64,634.09, plus statutory additions and interest from April 30, 2004, as provided by the Internal Revenue Code, with interest to accrue on the judgment as provided by 28 U.S.C. § 1961(c)(1), incorporating the rates of interest as provided by 26 U.S.C. § 6621.

It is hereby further stipulated and agreed that each party is to pay their own costs and fees, including any possible attorneys' fees or other expenses of this litigation.

IT IS SO ORDERED.

Date: JUN 9 2004

HON. ROBERT H. CLELAND

United States District Judge