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Statute of Limitations

A tax audit doesn’t always happen immediately after a return is processed.  Sometimes, it can even take years for the IRS to initiate an audit or send a notice to taxpayers regarding past taxes due. While this can be a very stressful surprise, understanding the ability for the IRS and FTB to collect on your prior returns depends on a number of factors and, in some cases, could lead to your benefit.

There are three different timelines that are important for taxpayers to understand when it comes to statutes of limitations: how long the IRS has to assess additional tax, how long the IRS has to collect on taxes owed, and how long taxpayers have to amend their returns to claim a credit or refund. Generally, the IRS has three years from the date a return is due or is filed, whichever is later, to assess additional taxes owed on that return. This timeframe is increased to six years if the taxpayer left off more than 25 percent of their earned income and remains open for an unlimited period of time if the information on the return was fraudulent. California taxpayers are under scrutiny for a longer period of time. Under the Revenue and Taxation code, the Franchise Tax Board has four years from the date of filing or the return was due, whichever is longer, to assess additional taxes, penalties, and fees. For taxpayers worried about minor amounts of unreported income from prior to the 2019 tax year this should bring some ease so long as their failure to report the income was not intentional.

For unpaid taxes, or for years that had additional income assessed, the IRS has up to ten years from the date of assessment to collect on the amount owed. California, meanwhile, has up to twenty years to collect these same assessments. This does not apply just to taxes owed, but to penalties and interest as well. These amounts accrue daily, leaving many taxpayers to be shocked when the amount owed is significantly higher than what was originally assessed.

For taxpayers worried about their options while abutting these deadlines, meeting with a tax professional is imperative. Depending on the situation, the IRS may be able to assess or collect on these years and amounts even after the statutory limit has passed.

Many taxpayers are shocked to learn that there is a statute of limitations on their ability to claim a refund or receive a credit on prior returns. Unlike the limitations that apply to the IRS, taxpayers are generally limited by the later of three years from the date they filed their original federal return or two years from the date the tax was paid. For California returns, the period lasts for four years from the date the tax return was originally due. This applies to several credits, including the foreign tax credit. If you need help amending a return to claim an unclaimed credit, discussing your options with a tax professional can help you determine whether your claim is still eligible.

Whether you received a notice of deficiency or are filing late returns, knowing when and how statutes of limitations apply is imperative. At Hone Maxwell LLP, our team can work with you to determine whether your returns or assessments fall within the statute of limitations. With this, we can assist you in managing your interactions with the IRS or the FTB to find ways to lower the amounts you owe and reduce the stress commonly associated with tax audits.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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