The statute of limitations in federal income tax law is a time period within which the Internal Revenue Service (IRS) can assess or collect taxes.
This concept is designed to provide certainty and fairness to both taxpayers and the government.
a. Who Benefits from the Statute of Limitations?
Both the government and the taxpayer benefit from the statute of limitations.
- Taxpayer: The statute provides a sense of security and finality. After the statute expires, taxpayers can be confident that they will not be subject to additional tax assessments for that particular tax year. This can be especially important for taxpayers who may have made errors or omissions in their returns.
Government: The statute helps to streamline the IRS’s workload by limiting the time it can pursue tax assessments. This can free up resources for other activities and prevent the IRS from pursuing outdated cases.
b. What Happens When the Statute is Imminent and an IRS Audit is Ongoing?
If the statute of limitations is scheduled to expire within two weeks and the IRS audit is not complete, the IRS may take several actions to extend the statute:
- Request an Extension: The IRS can request an extension from the taxpayer. If the taxpayer agrees, the statute of limitations is extended for the agreed-upon period.
Issue a Notice of Deficiency: The IRS can issue a notice of deficiency, which formally notifies the taxpayer of the proposed tax assessment. This action effectively extends the statute of limitations until the taxpayer responds to the notice.
File a Tax Court Petition: If the taxpayer disputes the notice of deficiency, they can file a petition with the Tax Court. This action also extends the statute of limitations.
In summary, the statute of limitations in federal income tax law is a crucial mechanism that benefits both taxpayers and the government. By setting a time limit for the IRS to assess and collect taxes, it provides certainty and fairness to all parties involved.
