IRS Help: Extending the Statute of Limitation in an IRS Audit

Congress imposed a time limitation on the IRS to assess taxes. Generally, the time limitation is three years.

After three years from the due date of the tax return or the filing of the tax return (whichever is later) the IRS cannot assess taxes on you. 

Think of assessing taxes as sending a bill. That is one of the reasons we stress the importance of filing all your unfiled returns. If you file returns, the IRS has no right to audit you and assess new taxes after three years from filing. If you don’t file the return for a specific year, the statute is open to an IRS audit for eternity. The statute of limitation of three years will also work against you when you want to claim a refund on prior years for which the statute of limitation lapsed.

When you have an IRS audit, and you disagree with the audit findings and decided to appeal, the IRS typically will ask you to waive the statute of limitation on the older year which may be getting ready to expire. That will allow the IRS time to prepare and consider the appeal.

The IRS will send you a letter asking you to extend the statute as soon as you file the appeal if the time on the oldest year under audit is running out. They will tell you that you have the right to refuse extending the statute, but one practically must need to sign it in order to get on with the audit appeal. You will also be advised that you can limit the scope of the statute of limitation extension.

There are two ways to limit the scope of the statute. The first is when you disagree with particular items in the IRS audit. If that is the case, you may extend the statute only to those items that you have tax problems with and that you care about. The second is that you can limit the time to extend the statute of limitation. Some contend that you can limit it to six months but a typical extension of the statute is one year. The IRS will add a few months to the year to make the date a calendar year thus you may end up extending the statute of limitation to say fifteen months instead of one year.

The IRS will send you a statute of limitation consent form (Form 872). Also they will attach Publication 1035, Extending Tax Assessment Period, which discusses in detail the nature of statute of limitation extensions, your rights and your options.  We typically recommend that our client signs the extension and we usually extend the statute to one year. It shows a good faith effort and we believe it will enhance the potential of a favorable IRS tax settlement.