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Statutes of limitations play key role in IRS tax controversies

Tax day has come and gone this year, and many taxpayers in California and around the country are breathing a sigh of relief. Gone are the late nights spent compiling paperwork and agonizing over tax forms. But for some unwitting taxpayers, their troubles may only just be beginning. The end of one deadline starts the clock ticking on another, namely the tax statute of limitations.

Statutes of limitations are an important part of the law and generally provide a legally defined time period within which a person must make a claim or a governmental entity must bring charges. In the area of taxes, they dictate the time the Internal Revenue Service can pursue taxpayers for civil and criminal tax violations, such as tax evasion or fraud. But once that time period expires, the IRS can no longer impose penalties on a taxpayer.

But like many areas of tax law, the statutes of limitations are complex and subject to an extensive variety of exceptions. Broadly speaking, the IRS has three years to pursue taxpayers for problems with a given year's return. That time period begins to run from the later of two dates: when the tax return was due or when it was filed. For example, the IRS could still go after taxpayer errors on a 2000 return that was filed a decade later.

But in some cases, the statute can be pushed to six years or even eliminated altogether, meaning the IRS could conceivably bring a case at any time in the future. Criminal tax matters often are subject to a 6-year statute of limitations. It is important to note, however, that in civil tax fraud cases, the IRS is not bound by any statute of limitations.

Although the rules tend to benefit the IRS, there are practical considerations that weigh in taxpayers' favor. Older tax controversies sometimes lack detailed documentation, making it hard for the IRS to bring a case, even if it is statutorily entitled to do so. People facing tax controversies can turn to an experienced tax attorney to discover how the applicable statute of limitations applies to their case.

Source: The Wall Street Journal, "When Can Tax Cheats Relax?" Laura Saunders, April 13, 2012.

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