IRS Statutes of Limitations for Tax Refunds, Audits, and Collections
The Internal Revenue Service gives itself plenty of time to make sure your tax situation is on the up-and-up. The tax code gives the IRS three years to audit your tax return and 10 years to collect any tax you might owe. It also sets a deadline for you—when you must file your return if you want to collect any refund that's owed to you.
All these limits are referred to as IRS statutes of limitations.
You Usually Have 3 Years to Claim a Tax Refund
You have three years from the date of the original deadline for your tax return to claim any refund you might be entitled to. Your 2020 tax return is due on April 15, 2021, so you have until April 15, 2024 to file your 2020 tax return and still get any tax refund that's due to you.
However, this deadline is bumped up by a year if you delay your payment of taxes. The statute of limitations is only two years from the date you paid (if this date is later than the three-year due date deadline).
Your refund expires and goes away forever if you wait longer than the deadline because the statute of limitations for claiming a refund will have closed.
Amended Returns and Extensions of Time to File
Amended returns claiming additional refunds adhere to the original statute of limitations—they must be filed with the IRS within three years of the original due date. If you get an extension on your returns, then the three-year statute of limitations clock begins on the day you file your taxes.
Exceptions to the 3-Year Refund Rule
There are two major exceptions to the three-year statute of limitations on refunds:
- Taxpayers have up to seven years to claim a refund resulting from deductions for bad debt or worthless securities.
- The three-year statute of limitations does not apply in situations where taxpayers are unable to manage their financial affairs due to physical or mental impairments.
What Happens to Your Refund If You Don't Collect?
If you are eligible for a refund but you don't file for it within the statute of limitations, the federal government keeps the money. This is considered an "excess collection" in IRS terminology. That refund money cannot be sent to the taxpayer, nor can it be applied as a payment toward a future tax year.
The IRS Has 3 Years to Audit Your Tax Return
The clock on a three-year statute of limitations for audits begins ticking on the day taxes are due. This deadline applies to most situations. In 2021, this will be April 15 in 2021. So, even if you file your return in February 2021, the IRS has until April 15, 2024 to initiate an audit.
If you ask for an extension of time to file, then the IRS would have three years from the date you actually file. If you file in August, for example, the three-year clock begins ticking in August.
Most state tax agencies follow the federal three-year period for auditing tax returns, but some states have longer statutes of limitations.
Exceptions to the 3-Year Audit Rule
There are exceptions to the three-year federal rule on assessments and audits as well:
- The IRS has six years from the date a return is filed to audit a tax return and to assess additional tax if the taxpayer omits income that amounts to more than 25% of that which was reported on the tax return.
- The IRS also has six years to audit a tax return and assess additional tax on income related to undisclosed foreign financial assets if the omitted income is more than $5,000.
- The statute of limitations on audits and assessing additional tax can remain open indefinitely if the taxpayer files a false or fraudulent tax return.
The IRS Has 10 Years to Collect Outstanding Tax Debts
The 10-year deadline for collecting outstanding debt is measured from the day a tax liability has been finalized, which can happen in a number of ways. Your liability might be considered finalized because it's the amount of tax reported on a tax return that you've filed, because it's an assessment of additional tax from an audit, or because it's a proposed assessment that has become final.
The IRS has 10 years to collect the full amount from the day a tax liability is finalized, plus any penalties and interest. The remaining balance disappears forever if the IRS doesn't collect the full amount within the 10-year period because the statute of limitations has expired.
The Statute of Limitations Can Be Suspended
The 10-year statute of limitations on collections can be suspended in the following situations:
- While the IRS is reviewing an offer in compromise, installment agreement, or a request for innocent spouse relief
- While a taxpayer is under the automatic stay of bankruptcy protection plus an additional six months
- For periods when the taxpayer resides outside the U.S. for at least six months
This suspension means that the clock effectively stops running during these times. For example, the IRS might take a month to evaluate your request for an installment agreement to pay a tax debt you owe. In this case, the 10-year statute of limitations is pushed back 30 days.
Using Time Limits to Plan Your Taxes
It's in your best interest to file your tax returns at your earliest possible convenience. First, you can claim any refund that is due to you. 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 a 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.