By Laura Saunders
April 12, 2024
You’ve filed your taxes, but you’re feeling anxious.
What about that income you forgot, or “forgot”? The deduction you shouldn’t have taken, or past returns you never filed at all?
Now you’re worried about the long arm of the Internal Revenue Service. How much time does the agency have to find you before the statute of limitations expires?
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The short answer is: three years, six years, 10 years or forever. Depending on the circumstances, you may have less time to sweat than you think—or much more. For example, the statute of limitations doesn’t start to run until a taxpayer actually files a return, so non-filers are never off the hook.
You’ll also need to decide how to deal with your error. Frank Agostino, a former IRS senior trial attorney now in private practice, has advice on this score that may seem surprising: Often the best approach is not to correct past mistakes, but instead to stop making them in the future.
“If the IRS hasn’t found you for a long time, the odds are they won’t. But correcting a past error can bring unwelcome attention, so I often tell people just to correct things going forward,” he says.
To help chart your course, here’s information about statutes of limitations—the amount of time that has to pass before you are in the clear—for individual tax filers. Also check laws for state taxes, which vary greatly.
Three years
Three years is the normal period the IRS has to question information on individual returns. The statute begins to run on the April due date—typically April 15—for taxpayers who filed by then and from the October due date—typically Oct. 15—for taxpayers with a six-month filing extension.
These dates apply even if someone files before the deadlines. For a taxpayer who filed on March 1 of this year, for example, the clock starts ticking on April 15.
The IRS has until the three-year deadline to query and audit, and often the taxpayer can appeal results within the agency.
If the issues aren’t resolved, the agency must send a Notice of Deficiency by the deadline to continue the case. This notice tells taxpayers they have 90 days to contest the tax by filing a petition with the U.S. Tax Court. If the taxpayer doesn’t, tax is usually assessed—with interest and possibly penalties.
Many IRS queries during this three-year period are generated by computer matching of taxpayer returns with data on W-2 or 1099 forms filed by employers, financial firms and others. These letters typically go out a year to 18 months after the return was filed, says Agostino.
Other queries arise when IRS computers spot deviations from norms, such as a return with unusually large business losses on Schedules C or E. Often these issues are more complicated and the agency needs time to investigate them, so it may ask the filer to consent to extend the deadline. If the filer refuses, the IRS often issues a deficiency notice assuming the worst case for the filer.
E. Martin Davidoff, who heads the tax controversy practices at Prager Metis CPAs and Davidoff Tax Law, frequently advises clients not to consent to an extension, especially if the auditor is aggressive or nonresponsive.
“Such auditors often miss critical issues, and it will be to the client’s advantage to fight the case in Tax Court,” he says. This requires filing a Tax Court petition, but doing so often bounces the case to an IRS appeals office or lawyers who will conclude it fairly, says Davidoff—and few cases go to trial.
Six years
The IRS has up to six years to find taxpayers who omitted more than 25% of their income. As with the three-year statute, it typically begins with either the April due date or the October due date.
The 25% threshold applies to gross income from all sources. If a filer neglects to report income from a capital gain and a side hustle but the total comes to 20% of gross income, then the agency likely has three years instead of six to find it.
How does the IRS discover this income? Perhaps there’s an information report from a third party, or an agent analyzes bank deposits. Agostino says many cases arise when agents check Suspicious Activity Reports filed by banks that track large cash deposits and withdrawals by customers.
10 years—or more
When it’s established that a taxpayer owes the IRS money, the agency has 10 years to collect it, including through seizures of wages or bank accounts, or the debt effectively ceases to exist. But the clock can pause for several reasons, such as if the taxpayer asks for an “offer in compromise” to reduce the amount owed.
Warning: Not hearing from the IRS for years doesn’t mean you won’t; the agency sometimes writes taxpayers in year 8 or later after a long silence. Both Davidoff and Agostino often advise taxpayers in this position not to take actions that could “wake up” the agency, such as asking for an offer in compromise.
The IRS can also pursue a federal court order extending the 10-year limit by 20 years from the date of the order. Such requests are rarely for amounts less than $150,000, says Agostino.
Forever
In three areas, there’s no statute of limitations. As noted above, the statute doesn’t begin to run until a return is filed. In addition, there’s no deadline for many foreign-income items, in part because securing cooperation from foreign authorities is often difficult or slow.
Finally and most dire, there’s no statute of limitations for civil or criminal tax fraud. However, proving fraud can be hard because the IRS must show the taxpayer’s evasion was willful.
What’s proof of willfulness? If a filer lies to his tax preparer and the preparer gives evidence, that could be proof. So could testimony by an ex-spouse or disgruntled employee who knew details of the fraud.
The IRS is also constrained. It expects more than 160 million individual returns for 2023, yet it has been able to bring fewer than 2,000 criminal tax cases a year recently. In practice, say specialists, the agency seldom goes back more than six years when pursuing fraud cases.
But not always: Agostino was involved in a case about a taxpayer’s non-filing of gift-tax returns for transfers to family members that concluded in 2015. He says the IRS pursued the non-filing back to 1968.
Write to Laura Saunders at Laura.Saunders@wsj.com
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