Determining the Statute of Limitations in Federal Tax Cases

CPA Journal, The, Aug 2006 by Breakfield, Robert H, Alvis, Charles E

A tax preparer's knowledge of the IRS collection statute of limitations (the legal bar to the collection of delinquent taxes) can be of valuable assistance to the taxpayer faced with a federal tax liability.

There are two basic statutes of limitation. First is the statute of limitations set forth in IRC section 6501(a), which provides that the IRS has three years to assess an additional tax due. For example, for a taxpayer who filed a 2004 tax return on April 15, 2005, the IRS has until April 15, 2008, to assess an additional tax. This rule has two major exceptions. The three-year statute is extended to six years in a case where the taxpayer has omitted more than 25% of gross income [see IRC section 6501(e)(I)(A)]. second, there is no statute of limitation in cases where no return has been filed, or where the taxpayer has filed a fraudulent return [see IRC sections 6501(c)(1), 6501(c)(2), and 6501(c)(3)]. These two exceptions permit the IRS to assess an additional tax at any time.

Less understood is the second basic statute of limitations that defines the period of limitation for the collection of the tax. IRC section 6502(a)(1) establishes a statute of limitation collection period of 10 years.

Taxpayers faced with a collection action must know the general rule of limitation and the circumstances when the statute is extended by agreement or by law.

When the Statute Begins to Run

Identifying the date on which the running of the collection statute commences depends upon the date the tax is assessed. (see IRC section 6203 and Treasury Regulations section 301.6203-1.) The assessment of the tax begins with the filing of the tax return, or with the final determination in the examination process. The assessment is not the same as the filing of the return. In the case of a paper return mailed to a service center or an electronically filed return, the assessment occurs when the assessment officer signs Form 23C, Assessment Certificate-Summary Record of Assessment. According to Treasury Regulation 301.6203-1, the assessment shall be made by an assessment officer signing the summary record of assessment. The U.S. Tax Court has upheld the use of computer-generated Revenue Accounting Control Report 006 (Summary Record of Assessment) in lieu of a hand-signed Form 23C [see Thomas W. Roberts v. Comm'r, 118 TC 365 (2002)].

Certain cases involve both an initial assessment and a subsequent assessment [IRC section 6204(a)]. The last assessment of the tax is the commencement date of the 10-year statute period. If a taxpayer files a paper return with the service center on April 15, 2005, the actual assessment of the tax may not occur until June or July 2005, when the assessment entry is made on the IRS's records (Treasury Regulations section 301.6203-1). If, however, the taxpayer's return is subject to examination and a subsequent assessment is made, the new period for the 10-year statute will commence with the recording of the second assessment [Treasury Regulations section 301-6502-1(a)(1)]. If the original return was filed with an unpaid balance due and a subsequent examination of the return resulted in a second assessment, then there will be two 10-year statutory periods. The initial balance assessment will start the 10-year statute for the first assessment; the balance due created by the subsequent examination will start the 10-year statute for the second assessment.

Precisely when the statute of limitation has commenced can be ascertained from a transcript of the taxpayer's account, which can be obtained by filing 1RS Form 4506-T. The transcript of the taxpayer account will identify the date of all assessments with respect to the tax years at issue. securing the transcript of account is an essential step to properly verify the time remaining on the collection of statute.

Certain factors stop the statute from running. Factors that interrupt the statute include a taxpayer agreement to suspend the statute, and the operation of law. The following are circumstances under which the taxpayer has agreed to toll the statute.

Form 900 and installment agreement. To avoid enforced collection activity (e.g., a levy against wages or a bank account), a taxpayer may seek administrative relief through the 1RS. The 1RS has the authority to enter into an installment agreement with a taxpayer, which is a contract whereby the 1RS suspends enforced collection action in exchange for the taxpayer's agreement to make installment payments. The revenue officer has the authority to condition the grant of an installment agreement with the requirement that the taxpayer consent to extend the collection statute of limitation.

The voluntary agreement to extend the statute is memorialized by the execution of 1RS Form 900; it is common practice in many 1RS offices to make this a condition of the installment agreement. Form 900 provides for the extension of the collection statute to some future specific date and fixes the date of the extension by agreement. The execution of a Form 900 is reflected on the taxpayer's transcript of account, and constitutes a critical piece of evidence in determining the time remaining under the statute. The American Jobs Creation Act of 2004 amended IRC section 6159 to allow the 1RS to enter into installment agreements that will result in only a partial payment of the tax liability before the 10-year statutory period expires; under this new procedure, a revenue officer cannot condition an agreement with a demand to sign Form 900. The IRS website, www.irs.gov, has additional information on the partial-payment option.