In today’s world, taxes have become a well-known term among people worldwide. Taxes are generally the most fundamental way of giving money to the government for the services and resources it provides its citizens throughout the nation. The government collects taxes based on the income of the people, irrespective of the job they are doing.
Taxes are levied based on specific income brackets, which can be changed by the government as and when required. Although the word tax is standard nowadays, people still find it challenging to get accustomed to the time limits of their pay-offs. In this blog, we will discuss the IRS statute of limitations – time limits for tax debt and how it impacts the tax debt if not cleared on time.
The IRS, as we all know, stands for Internal Revenue Service, which is a government body operating within the United States that focuses on maintaining the nation’s tax integrity by ensuring that the citizens abide by the tax laws.
They collect all types of taxes through income, payroll, and many more from people and businesses nationwide. They provide the collected taxes to the government so that the citizens can benefit from the services of the government.
The IRS Statute of Limitations
The IRS Statute of Limitations is one of the most fundamental concepts every taxpayer must know before paying taxes. It refers to the time constraints by which the IRS can take action regarding a person’s tax returns or collections. We will discuss it below as knowing the time limits to avoid undue stress and legal punishments is crucial.
- The Three-Year Rule simply states that all taxes must be filed within three years. The IRS usually has three years from the tax filing submission to examine the filing or whether to impose other charges or taxes above the filed one.
- The six-year Rule states that the IRS has six years to audit the tax file if a person has underreported their income over 25%. This rule is made to prevent people from not paying taxes as this rule gives the IRS the time to audit each and everything minutely and can catch even the slightest underreport in a tax file.
- Fraud – There is simply no statute of limitations if the IRS suspects or gets evidence regarding fraud. The IRS can audit and assess taxes anytime they want if the taxpayer is found to be intentionally involved in fraudulent activities or businesses.
- Unfiled Returns – If a person did not file their taxes on time, there is no IRS statute of limitations, and the IRS can come at you anytime until the person does not file their taxes. A person also needs to file an accurate one; otherwise, they will be open to legal issues due to underreporting or misreporting when the IRS audits their files.
- Collection Statute – After the IRS completes all the calculations related to the money owed, they have a period of 10 years to collect back the owed sum, starting from the day they calculated the entire amount. But in some cases, the period can be extended if a person has gone bankrupt or tries to repay the tax amount owed under a payment plan as provided by the US government.
Exceptions in the Statute of Limitations
Although we discussed the primary time limits one must consider before filing taxes, there are also certain rare or exceptional cases where the statute of limitations can result in a different outcome. Below mentioned are a few of them –
- State Tax Consideration – State tax authorities collect taxes on their time limits. The State’s time limits are generally different from those of the nation. Thus, it is crucial to follow the state laws if a person owes any tax to the state.
- Foreign Income – The IRS has different specific rules if a person has a foreign asset or has foreign income. Thus, the time limit for such cases is also not the same. The time limit is generally longer in such cases when people do not report their foreign accounts or income.
- Amended Returns – This simply means that if a person makes changes in their respective tax files after already filing it once, then automatically, the time limits get extended for the IRS to authenticate the filing of return of that year.
- Extensions – These refer to some special events that can result in the extension of the time limit for the IRS to validate the tax filing. Suppose a person goes bankrupt, then the legal process of taxes is paused for a while, thus providing the person to start paying off the tax debts. In cases where a person agrees with the IRS to pay off the debts in installments under a payment plan, the period is automatically extended for the person to pay off the tax debts.
It is always advisable to consult with an experienced tax professional or advisor who can guide you professionally through the time limits and the entire taxation system. They can also help manage your tax clearances and warn about unpredictable errors that may lead to legal matters.
Final Overview
It is crucial to understand the time limits and exceptions of the IRS and how you can avail of them without any hesitation. Planning your future, knowing the IRS statute of limitations, and how long one needs to pay taxes often gives people peace of mind.
Although many complications can be found in the system, keeping updated with it is the only option for taxpayers other than consulting any legal or tax advisor, giving accurate news, and researching the updated policies. Ensure to conduct thorough online research to learn more about this detailed topic.
