The Statute of Limitations for Assessment, is a time limit, on the Internal Revenue Service (“IRS”), in which to assess taxes, against the taxpayer, for a particular tax year.
In general, the IRS has three (3) years, after the later of the filing date or the unextended due date, in which to assess. This three (3) year deadline is referred to as the Assessment Statute Expiration Date (“ASED”). The three (3) year clock begins as of the day after the tax return is filed which is the received date. The ASED provides finality, to the IRS and to the taxpayer, after the IRS has had a reasonable opportunity to audit liabilities, discover additional information, and make adjustments.
A valid tax return must be filed in order to activate the ASED. A valid tax return must: (i) contain enough information to calculate the tax liability; (ii) be identified as a tax return; (iii) be an honest and reasonable attempt to comply with the tax laws; and (iv) be executed under the penalties for perjury. There is no ASED in the event of an unfiled tax return. A late filed tax return activates the ASED as of the date of the late filing. There is no ASED in the event of a Substitute for Return.
The ASED can be extended. The ASED can be extended from three (3) years to six (6) years or longer if there is a substantial omission of income. The ASED can be extended by written agreement, between the IRS and the taxpayer, but the taxpayer must be advised of the right to refuse to agree to an extension.
The ASED can be suspended for a variety of reasons. If the ASED is suspended, then the remaining time, on the ASED, is tacked on to the end of the suspension period in order to determine the adjusted ASED. A very common reason, for the suspension of the ASED, is a Notice of Deficiency (“NOD”).
If, pursuant to a NOD, the taxpayer does not file a Petition in Tax Court, then the ASED is suspended for ninety (90) days plus sixty (60) days. If, pursuant to a NOD, the taxpayer does file a Petition in Tax Court, then the ASED is suspended for ninety (90) days plus until the date the Tax Court decision becomes final plus sixty (60) days. If, pursuant to a NOD, the taxpayer agrees to the deficiency and waives the restrictions on assessment, then the ninety (90) day suspension is terminated and the ASED is suspended for sixty (60) days.
In the event of a fraudulent tax return, there is no ASED. Under such fraudulent circumstances, even a subsequently filed honest tax return will not activate the ASED. Clearly, discouraging taxpayers from committing fraud is a strong IRS public policy concern.
Finally, the IRS cannot assess a tax deficiency after the occurrence of the ASED.