Understanding Tax Refunds, IRS Audits, and Collections

Understanding Tax Refunds, IRS Audits, and Collections

The Internal Revenue Service (IRS) has a lot of time to ensure your tax condition is on the up-and-up. The tax code grants the IRS three years to audit your tax return and ten years to take any tax you owe. It also puts a time limit for you—when you are required to file your return if you desire to receive your refund. These laws are known as ‘statutes of limitations.’

You Have 3 Years to Claim your Tax Refund

You are given three years from the date of the original time of the tax return to claim your refund. For example, your 2018 tax return expired on 15th of April, 2019. Adding three years to this filing date, you have until April 15, 2022, to file your 2018 tax return and still get it. If any delay occurs, your refund will expire. It is forever gone because of the closure of the statute of limitations for claiming a refund 

Any amended returns claiming additional refunds must be filed with the IRS before the three-year statute of the margin expires, which would be the April 15 of the due date—unless you filed for an extension. This will, therefore, shift the statute of limitations to October of the particular year, which is effectively the new due date after you have filed for an extension. The IRS can issue refunds for a specific year if you have made a request an extension and afterward file a tax return in the space of three years from the new closing date.

There are two clauses to the three-year ‘statute of limitations’ on refunds:

Taxpayers are given up to seven years to claim refunds that are from deductions for worthless securities or bad debt.

The three-year statute of limitations is not applicable in situations where taxpayers are not able to manage their financial situation due to mental or physical damages.

What is the aftermath of not collecting a refund?

Once a refund terminates, the federal government holds the money. In the terminology of the IRS, it's termed an "excess collection." That refund money can’t be sent to the taxpayer, nor can it be used as a payment for a future tax year. 

The Inland Revenue Service Has Three Years to Perform Audit on Your Tax Return 

This deadline is determined from the day you file your tax return except you filed your taxes before the deadline. So if your return was filed in February 2019, the IRS has till April 2022 to initiate an audit.

Most state tax agencies align with the federal three-year deadline for auditing tax returns, but some states act on lengthy laws.

Three exceptions to the three-year federal rule exist on assessments and audits: 

The IRS is given six years from the date a return is filed to audit a tax return and to calculate additional tax if the taxpayer omits income that amounts anything above 25 percent of that which was documented on the return on tax

The IRS audits a tax return within six years and calculates additional tax on income related to private foreign financial assets if the lost revenue is above t $5,000.

The order of limitations on audits and calculating additional tax stays open indefinitely if the taxpayer files a wrong or fraudulent return on tax.

IRS collects debt outstanding within ten years

This is calculated from the day a tax liability has been concluded, which takes place in various ways. Your liability may be regarded as completed because it is the amount of tax stated on a tax return that you have filed, because it is a calculation of additional tax from an audit, or because it is a proposed assessment that has become final.

The IRS has ten years to receive the full amount beginning from the day a tax liability is concluded, including any penalties and interest. If the IRS doesn't receive the total amount in ten years, the balance is gone forever because the statute of limitations has ended. You are free.

The statute of limitations(10 years) on collections can get suspended given the following situations:

  • While the Inland Revenue Service is reviewing installment agreement, innocent spouse relief,  an offer in compromise, a collection due in facilitating the hearing.
  • While the tax paying citizen is under the ‘ stay of bankruptcy protection’ plus an additional six months.
  • For a timeline when the taxpayer lives outside the United States for at least six months.

Adopting Time Limits to Prepare Your Taxes

It's in your interest to file your returns on your tax as soon as it is convenient for you. First, you can claim any refund due. Second, it starts the clock ticking on the three-year statute for audits and the 10-year statute for collections.

There are unique planning opportunities available to the filer if multiple tax years are involved because refunds that are still allowed under the three-year time limit can be used to pay off other tax debts owed to the IRS or applied to your current year's estimated taxes.

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