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Time Limits for Refunds, Audits, and Collections
Plan Your Tax Strategy Around These Time Limits
The IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due. Together, these laws are called the "statutes of limitations." They put time limits on various tax-related actions that you and the IRS can take.You have 3 years to claim a tax refund. This is measured from the original deadline of the tax return, plus three years. For example, your 2001 tax return is due on April 15th, 2002. 2002 plus 3 is 2005. You have until April 15th, 2005, to file your 2001 tax return and still get a tax refund. File your 2001 return on April 16th, 2005, and your refund "expires." It goes away forever. This is called the statute of limitations for claiming a refund.
The IRS has 3 years to audit your tax return or to assess any additional tax liabilities. This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. For example, you filed your 2004 tax return on February 15th, 2005. The 3-year time period for an audit begins ticking from April 15th, 2005 and will stop ticking on April 15th, 2008. On April 16th, 2008, the IRS cannot audit your 2004 tax return unless there is a suspicion of tax fraud.
The IRS has 10 years to collect outstanding tax liabilities. This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever. The statute of limitations on collecting the tax has expired.
Let's provide an example based on a real-life scenario. Mr. Smith wants to file 5 years of tax returns: 1999 through 2003. All years he has refunds. If he files by April 15th, 2005, Mr. Smith will receive refunds for his 2001, 2002, and 2003 tax returns. His refunds for 1999 and 2000 have expired.
Let's change the example slightly. Mr. Smith wants to file 5 years of tax returns: 1999 through 2003. In 1999 and 2000, he could have received a refund. In 2001, 2002, and 2003, he owes. Mr. Smith cannot apply his 1999 or 2000 refunds as an estimated tax payment towards his 2001 taxes. His refunds have expired. For the 2001 to 2003 tax returns, the IRS has ten years to collect the full tax, plus penalties and interest, from the date Mr. Smith actually files the returns.
Action Plan Item: It is in your best interest to file your tax returns at your earliest convenience. First, you can claim refunds. Second, it starts the clock ticking on the 3-year statute for audits, and the 10-year statue for collections.
