What is the Statute of Limitations for the IRS to Assess Tax, and Are There Exceptions for Taxpayers Abroad?

In law, a “statute of limitations” is a legal deadline establishing a timeframe for bringing a claim or, where suspected crimes are concerned, charging a defendant. For example, in the context of criminal law, a prosecutor would be required to file charges before the pertinent statute of limitations “expired,” or ran out of time. In tax law, one of the most important deadlines is the statute of limitations for the assessment of tax, which generally allows the Internal Revenue Service (IRS) up to three years from the date on which the return was filed. However, federal laws establish several exceptions to this rule, extending the assessment period in certain situations, such as failure to file a tax return in which case the statute never begins to run and therefore is perpetually “open”.  It is important for taxpayers to familiarize themselves with these exceptions, particularly in the context of international tax law.

How Long Does the IRS Have to Assess Tax?

The Internal Revenue Code (IRC) governs federal tax laws in the United States. Because the Internal Revenue Code was also published under Title 26 of the U.S. Code, IRC statutes are sometimes referred to in this context, which can create confusion for taxpayers. To use an example, IRC § 6501 and 26 U.S. Code § 6501 contain identical information.

Regardless of format, both sets of code establish regulations directly impacting millions of taxpayers, including various statutes of limitations, such as the deadline for “assessing” tax, or recording the taxpayer’s tax liability. Specifically, 26 U.S. Code § 6501(a) provides, in part, “Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within three years after the return was filed (whether or not such return was filed on or after the date prescribed).”

The exceptions referenced in 26 U.S. Code § 6501(a) are set forth under 26 U.S. Code § 6501(c), which permits the IRS additional time for assessment of taxes in the following tax scenarios:

• The IRS has up to six years to assess taxes if:
  • The taxpayer fails to disclose certain facts on a personal holding company return.
  • There has been a “substantial omission of items,” such as omission of an amount greater than $5,000.

• The IRS has an unlimited amount of time to assess taxes if:
  • The taxpayer fails to file a tax return.
  • The taxpayer intentionally files a false or inaccurate tax return in an effort to evade tax.
  • The taxpayer makes a deliberate or “willful” attempt to commit tax evasion. Note that this time extension does not apply in cases where taxpayers act with negligence, or lack of due care.
    • Note: The IRS has either 5 or 6 years, depending upon the particular criminal tax statute, to criminally prosecute income tax evasion as opposed to merely civilly assessing additional tax which has no statute of limitations where tax fraud is subsequently proven to have occurred.

As the foregoing list makes plain, federal law generally allows the IRS as much time as is needed – decades, if necessary – to assess tax when a taxpayer engages in intentional or fraudulent acts, such as stating false information on a federal income tax return. It is critical for taxpayers to understand that, in cases where fraud or tax evasion is suspected, and the last affirmative act of evasion occurs within the 5 or 6 year criminal statute, such as lying to an IRS civil auditor or criminal investigation special agent about the prior tax fraud, in which case no amount of time passing will prevent an IRS investigation by the IRS Criminal Investigation Division, nor will the passage of time stop prosecution by the Department of Justice (DOJ).

Important Exceptions to Statutes of Limitations in International Tax Law

These regulations can affect any taxpayer who is obligated to file a personal income tax return or business tax return. However, international taxpayers may be uniquely impacted, such as expatriates or U.S. citizens living abroad in nations like Switzerland, Mexico, and Saudi Arabia. Specifically, international taxpayers may be affected by two tax-related statutes of limitations:

1. The statute of limitations under 26 U.S. Code § 6501(c)(8). This section addresses cases where taxpayers fail to notify the IRS of certain foreign transfers involving elections and information returns, such as Form 1098 (Mortgage Interest Statement). If the taxpayer fails to disclose the necessary information, the statute of limitations for the tax return will not expire before the date, which is three years after the IRS receives the required information. However, under 26 U.S. Code § 6501(c)(8)(B), “If the failure to furnish the information… is due to reasonable cause and not willful neglect,” the time extension will only be applied to “the item or items related to such failure.”
2. The statute of limitations under 26 U.S. Code § 6501(e)(1)(C). This section allows the IRS an assessment period of up to six years if the taxpayer omits from his or her gross income any amount which should have been included, such as Subpart F income.

CPA-Attorneys Providing Tax Planning Services for Non-Residents and U.S. Expats

The U.S. Tax Code outlines numerous situations in which the IRS is authorized to assess tax well beyond the three-year statute of limitations that normally applies. For taxpayers who are concerned about the assessment of taxes, it is not a viable strategy to simply “wait it out” or “run out the clock” – particularly not in situations where taxpayers have willfully failed to report foreign or domestic income.

Whether you are concerned about prior failures to file tax returns or pay taxes, need clarification of your income reporting requirements as an expatriate or citizen abroad, or simply have questions about your IRS payment options if you are having difficulty managing your tax bill, the experienced CPA-attorneys at the Tax Law Office of David W. Klasing can provide tailored financial and legal guidance to minimize your tax liability while bringing you into compliance with the law.

Serving individual taxpayers and business entities in California and abroad, our respected tax law firm can help you file an FBAR, participate in the OVDP, avoid or minimize penalties for failure to file taxes, learn strategies for better tax planning for foreign companies, and resolve other matters. To arrange a reduced-rate consultation concerning a tax controversy, tax crime defense, or general tax planning for individuals and corporate entities, contact the Tax Law Office of David W. Klasing online, or call us at (800) 681-1295 today.