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Dean Alexander: Extending the statute of limitations

Guest business commentary

Posted: December 28, 2010 10:35 p.m.
Updated: December 29, 2010 4:55 a.m.

Congress imposed a time limitation on the IRS to assess taxes generally to three years. After three years from the due date of the tax return or the filing, whichever is later, the IRS cannot assess taxes on you. 

Think of assessing taxes as sending a bill. That is one of the reasons we stressed the importance of filing all your unfiled returns. If you file returns the IRS has no right to audit you and assess new taxes after three years from filing. If you don’t file the return, it is open to the IRS audit for eternity. The statute of limitations of three years also will work against you when you want to claim a refund on prior years for which the statute of limitations lapsed.

When you have an IRS audit and you disagree with the audit findings and you decide to appeal, the IRS typically will ask you to waive the statute of limitations on the older year that may be getting ready to expire. That will allow the IRS time to prepare and consider the appeal.

The IRS will send you a letter asking you to extend the statute as soon as you file the appeal if the time on the oldest year under audit is running out. They will tell you that you have the right to refuse extending, but practically you need to sign it in order to get on with the appeal. You will also be advised that you can limit the scope of the statute of limitations extension.

There are two ways to limit the scope of the statute. The first is when you disagree with particular items in the IRS audit, you may extend the statute only to those items that you have tax problems that you care about. Or you can limit the time to extend the statute of limitation. Some contend that you can limit it to six months, but a typical extension of the statute is one year. 

The IRS will add a few months to the year to make the date a calendar year, so that you may end up extending the statute of limitation to, say, 15 months instead of one year.

The IRS will send you a statute of limitations consent form (Form 872.)  Also, they will attach Publication 1035, Extending the Tax Assessment Period.  The publication discusses in detail the nature of statute of limitations extension, your rights and your options. We typically recommend that our clients sign the extension and we usually extend the statute to one year. It shows a good faith effort that we believe will enhance the prospect of IRS tax settlement.

Dean Alexander has 30 years experience as a CPA and a tax consultant. His column reflects his own views and not necessarily those of The Signal.


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