Understanding the applicable statute of limitations in federal tax matters is crucial. Tax cases have been won or lost on this issue alone. There are three separate areas of the tax code that address the statute of limitations in IRS civil tax cases.
The Assessment Statute Expiration Date (ASED)
The IRS Assessment Statute Expiration Date (ASED) is the end of the time in which the IRS can assess tax with respect to a particular tax year. The general rule is that an assessment of tax must be made within three years from the received date of an original tax return or three years from the due date of the return, whichever is later.
In cases where a tax return is filed before the original filing deadline, the return is considered as filed on the date of this filing deadline. For example, a 2022 individual income tax return filed on or before the April 17, 2023, filing deadline would have a statute of limitations for the IRS assessment of additional taxes of April 17, 2026. In practical terms this means the IRS has until that date to assess any additional taxes stemming from the correction of a return filing error, unreported income or an audit.
There are some exceptions to the three-year limitation for the IRS to assess additional tax. If more than 25 percent of gross income is omitted from a tax return, the IRS can assess additional tax for up to six years from the date the return was filed. In cases involving a fraudulent return with the intent to evade tax, the IRS has an unlimited amount of time to assess tax. Additionally, the statute of limitations does not begin running until a tax return is filed, so in cases involving unfiled tax returns, there is no time limitation for the IRS to assess tax.
The Collection Statute Expiration Date (CSED)
The Collection Statute Expiration Date (CSED) marks the end of the collection period, the time established by law for the IRS to collect taxes. The CSED is normally 10 years from the date of the assessment. This gives the IRS a much longer period to collect assessed taxes than to assess taxes.
Additionally, this ten-year period to collect assessed taxes is extended in certain circumstances. Generally, the CSED collection period is suspended when the IRS is prohibited from collecting tax. Common events that can cause the extension of the CSED include pending installment agreement requests, filing for bankruptcy, pending offers in compromise and a Collection Due Process hearing. These events can prevent the IRS from collecting tax assessments for months and, in some cases, years. In these cases, the time in which the IRS was unable to pursue collection of the assessed tax is added to the statute of limitations. For example, if a taxpayer had a Collection Due Process hearing that took six months to resolve, the IRS would be allowed an additional six months after the 10-year statute date to collect tax.
Refund Statute Expiration Date (RSED)
One of the most misunderstood statutes is the Refund Statute Expiration Date (RSED). The RSED is the end of the time in which a taxpayer can make a claim with the IRS for a credit or refund. If a claim is not made within the specified time, then a taxpayer may no longer be entitled to the credit or refund.
Generally, a claim for a credit or refund must be filed within three years from the filing date of the original return or two years from the date the tax was paid, whichever is later. In cases where a claim is filed after the three-year period, but within two years of the date the tax was paid, the credit or refund cannot be more than the tax amount paid within this two-year period.
Many taxpayers file claims after the RSED date and are surprised to learn that the refund cannot be paid or credited to another tax year due to this statute of limitations.