There are several statutory periods of time beyond which taxpayers or the IRS may not take certain actions. Those include statutes of limitation on assessment, collections, refund claims, liens, levies, petitions to redetermine tax, and petitions to challenge denial of requests for innocent spouse relief.
Assessment, §6201. Before tax is permitted to be collected, the tax must be “assessed” and a demand for payment must be mailed to the taxpayer. An “assessment” is made by an “assessment officer” signing the daily summary record of assessment. Form 23-C or RACS Report-006, “Summary Record of Assessment”. § 6203, Reg. § 301.6203.1. Proof of the assessment can be obtained from the IRS. Assessment must occur no later than three years after the return was filed. § 6501. Assessment may occur at any time if a fake return was filed, if no return was filed and if the taxpayer willfully attempted to evade tax. In the case of a “substantial omission”, tax may be assessed at any time within six years after the return was filed. A “substantial omission” is an omission of 25 percent or more of gross income stated on the return.
Prior to an assessment, the taxpayer usually receives various administrative notices, and then the taxpayer receives a statutory Notice of Deficiency, often referred to as a “90-day letter” or a “Statutory Notice”.
Administrative 30-day Letter
Statutory Notice of Deficiency, § 6212, § 6213
Statutory Notice and Demand, § 6303
Statutory Lien, § 6321 and § 6322
Collection of Tax, § 6502
Statutory Notice of Lien, § 6320
Statutory Notice of Levy, § 6330 and § 6331
Statutory Notices of Liens and Levies, § 6320 (c) and § 6330 (d).
Statutory Notice of Determination Innocent Spouse Relief, § 6015
Suspension of Statute of Limitations, § 6503
Credits or Refunds, § 6511
Frivolous Hearing Requests, § 6702
Special Tax Considerations for Veterans
- an increase in the veteran’s percentage of disability from the Department of Veterans Affairs (which may include a retroactive determination) or
- the combat-disabled veteran applying for, and being granted, Combat-Related Special Compensation, after an award for Concurrent Retirement and Disability.
To do so, the disabled veteran will need to file the amended return, Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A or 1040EZ. An amended return cannot be e-filed. It must be filed as a paper return. Disabled veterans should include all documents from the Department of Veterans Affairs and any information received from Defense Finance and Accounting Services explaining proper tax treatment for the current year.
Please note: It is only in the year of the Department of Veterans Affairs reassessment of disability percentage (including any impacted retroactive year) or the year that the CRSC is initially granted or adjusted that the veteran may need to file amended returns.
Under normal circumstances, the Form 1099-R issued to the veteran by Defense Finance and Accounting Services correctly reflects the taxable portion of compensation received. No amended returns would be required, since it has already been adjusted for any non-taxable awards.
If needed, veterans should seek assistance from a competent tax professional before filing amended returns based on a disability determination. Refund claims based on an incorrect interpretation of the tax law could subject the veteran to interest and/or penalty charges.
Frequently Asked Questions Regarding Filing Amended Returns for Disabled Veterans
Under normal circumstances, the Form 1099-R issued to the veteran by the Defense Finance and Accounting Services correctly reflects the taxable portion of compensation received.
I received an email that states I’m due a refund from IRS, because I get disability compensation from the Department of Veterans Affairs. Do I need to file an amended tax return?
The Defense Finance and Accounting Services generally would not send an email to veterans advising them to file an amended return.
The Department of Veterans Affairs just sent me a determination letter that increased my disability percentage from 30% to 50%, retroactive to 2010. What should I do?
Because the redetermination is retroactive, your previously taxable pension income can now be reduced by the adjustment. You may file amended returns, Forms 1040X, for tax years 2010 and 2011.
Special statute of limitations. In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service connected disability rating determination, the statute of limitations is extended by a 1 year period beginning on the date of the determination. This 1 year extended period applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination.
Example. You retired in 2006 and receive a pension based on your years of service. On August 1, 2012, you receive a determination of service connected disability retroactive to 2006. Generally, you could claim a refund for the taxes paid on your pension for 2009, 2010, and 2011. However, under the special limitation period, you can also file a claim for 2008 as long as you file the claim by August 1, 2013. You cannot file a claim for 2006 and 2007 because those tax years began more than 5 years before the determination.
Veterans who have questions on filing claims for refund and filing of amended returns are encouraged to seek assistance from a competent tax professional
The IRS has three methods in which it assesses taxes. IRC §6203. The first method is the automatic assessment that occurs when a taxpayer files a return without paying the tax due. This is sometimes referred to as self-assessment. The second is the deficiency assessment that occurs after examination and administrative and judicial review. If the taxpayer files a petition to the Tax Court after receipt of a Statutory Notice of Deficiency, assessment is postponed until the Tax Court’s final decision. The third method of assessment is the termination or the jeopardy assessment. An example of this kind of assessment may occur when the IRS believes the taxpayer is planning to leave the country in an effort to evade paying the tax liability.
After the taxpayer has failed to respond to the administrative 30-day letter, the IRS will automatically issue a Statutory Notice of Deficiency, commonly referred to as a 90-day letter or stat notice. (There is one other 90-day letter that deals with Innocent Spouse Relief.) The 90-day letter may not come for several months after the audit has ended, and it must be sent to the taxpayer by certified mail. It is sent to the taxpayer’s address that is on file with the IRS. The 90-day letter provides the taxpayer with an opportunity to file a petition with the Tax Court for a redetermination of the deficiency.
After receiving the 90-day letter the taxpayer has three options; firstly, the taxpayer can file a petition to the Tax Court (this is the course of action most often taken in the Tax Clinic). The second option is to pay the amount in dispute and file a lawsuit for refund in the U.S. District Court or the U.S. Court of Federal Claims. This option is not available to most of the clients in the Tax Clinic simply because they are not likely to be in a position to pay the deficiency upfront. Furthermore, the Clinic does not handle refund suits. Thirdly, the taxpayer can again do nothing and the matter will move into the collections process.
If a taxpayer comes to the Tax Clinic before the 90-day period expires, then most likely the student attorney will file a petition with the Tax Court. The only cost associated with the filing of the petition is a sixty dollar ($60.00) filing fee, and if necessary, the student attorney can request that this fee be waived. It will be waived if it is shown that the taxpayer cannot afford the filing fee. When the client comes into the Tax Clinic the student attorney should notice the date on the 90-day letter, because the taxpayer has ninety days from the date on the face on the 90-day letter to file a petition in the Tax Court (150 days if the taxpayer resides outside the United States). This ninety day statute of limitations is of utmost importance in preserving the client’s rights. If the taxpayer does not respond to the 90-day letter, the amount will be assessed and the matter will be turned over to the collections division of the IRS. A student attorney who inadvertently fails to file a petition may receive a failing grade in the clinic.
Any petition filed with the Tax Court on or before the last day of the ninety day period shall be treated as timely. The 90-day letter is treated as if it was received by the taxpayer as long as it was sent to the taxpayer’s last known address. The ninety day period cannot end on a Saturday, Sunday, or a legal holiday observed in the District of Columbia. If it does, the petition is due on the next business day.
In general, the issuance of the 90-day letter followed by the filing of a petition to the U.S. Tax Court by the taxpayer triggers §6212(c)(1), which prohibits the IRS from determining any additional deficiency of income tax for the same taxable year, of gift tax for the same calendar year, or of estate tax in respect of the taxable estate of the same decedent.
During that ninety day period, the statute of limitations on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency shall be suspended until sixty days after the taxpayer has a final decision form the Tax Court. §6503(a)(1)
The IRS has 3 years from the date the return was filed to issue a notice of deficiency. A return is deemed filed on the last day of filing for the tax year if it was filed early. Also, the IRS may file a substitute return for nonfilers. However, the statute of limitations on assessment will not begin to run in the following cases:
- False return
- Willful attempt to evade tax
- No return filed or
- Extension by agreement
There is a 6 year statute of limitations on assessment if the taxpayer omits in excess of 25% of the amount of gross income. For some time there has been a debate as to whether this 6 year statute applied only to the actual income left off the return or whether it could also apply to an overstatement of basis. Recently the Supreme Court in U.S. v. Home Concrete and Supply, LLC, SCT. 2012 stated that § 6501(e) is limited to income left off the return and that overstated basis did not constitute income left off of the return. Effective for returns filed after July 31, 2015 (and for returns filed prior to July 31, 2015 if the § 6501 limitations period calculated without regards to the new legislation has not expired), Congress overruled the Supreme Court and amended § 6501 (e) (1)(B) to define gross income as including an overstatement of basis or unrecovered cost. (Surface Transportation and Veterans Care Choice Improvement Act of 2015). The 6 year limitations period arises in the clinic frequently, where the taxpayer did not report the distribution from a retirement account. It may also arise if the client overstates a basis in an asset to claim larger depreciation or reduce the capital gain upon disposition.
- IRC §6201: Assessment Authority
- IRC §6202: Mode or Time of Assessment
- IRC §6203: Method of Assessment
- IRC §6501: Limitations on Assessment
Limitation on Collections
Internal Revenue Code § 6502 provides for the statute of limitations for collection after assessment. Code § 6503 provides some rules for when the statute of limitation is suspended. These sections reflect the modifications made by the Restructuring and Reform Act of 1998 (P.L. 105-206, § 3461(a)(2)) (RRA 98) and The American Jobs Creation Act of 2004, section 6159. RRA 98 eliminated the unlimited ability of the parties to extend indefinitely the statutory period for collection by agreement and substituted a fixed bright line time period.
A transition rule is in effect for any request to extend the period of limitations made on or before December 31, 1999. Under this rule, if a taxpayer agreed to extend such period beyond the 10-year period referred to in section 6502(a) of the Internal Revenue Code of 1986, such extension shall expire on the latest of:
- (A) the last day of such 10-year period;`
- (B) December 31, 2002; or
- (C) In the case of an extension in connection with an installment agreement, the 90th day after the end of the period of such extension.
There are several situations when the statute of limitations for collection is suspended. Those that the Clinic deals with usually are: petitions (§ 6503(a)), bankruptcy (§ 6503(h)), offers in compromise (§ 6331(k)), situations when the tax lien is reduced to judgment, while certain installment agreements are pending, and when certain levies are prohibited (§ 6331). The taxpayer’s transcript will show the information from which the student can compute the correct statute of limitations.
- If the taxpayer files a valid and timely Tax Court petition, Code § 6503(a) provides that the IRS cannot assess or collect any unpaid tax until the Tax Court decision becomes final and for 60 days thereafter.
- Section 6503(h) suspends the period for collection for the period the individual is in bankruptcy plus 6 months thereafter. The student can determine this period from the dates on the transcript and/or the PACER information. If a taxpayer files a bankruptcy petition after a notice of deficiency is mailed but before the 90-day period (150 days if taxpayer is out of the country) expires, the 90-day period is suspended from the date the bankruptcy petition is filed until the taxpayer is discharged or dismissed, plus 60 days.
- The statute is suspended for any period that an offer in compromise is pending plus 30 days thereafter and, if an appeal of such rejection is filed within such 30 days, during the period that such appeal is pending. The pending date begins the date the Service accepts the offer for processing. Section 6331 (k)(1).
- Under Code § 7403, the United States can bring an action in United States District Court to reduce the tax claim to judgment thereby extending the original statute date.
- In general, if a taxpayer submits an installment agreement, the statute of limitations is suspended while the agreement is pending and for a period of 30 days following rejection or termination. There are exceptions to this general rule. Prior to the effective date of The American Jobs Creation Act of 2004, Code § 6159 provided for installment agreements only for “satisfying the liability.” The law changed the words to “make payment on” and inserted “full or partial.” This appears to have created two types of installment agreements. There is a full-pay installment agreement that must be paid over no more than 3 years and for which there is no waiver of the S/L or no extension of the CSED. See IRM 5.14.2
The newly created installment agreement is the Partial Payment Installment (PPIA) Agreement (i.e. installment agreements that do not provide for full payment of the liabilities.) IRM 22.214.171.124(9) limits the extension of the waivers to 5 years plus 1 year. The use of the waiver is limited by policy to those in I.R.M. § 126.96.36.199.3.
I.R.M. § 188.8.131.52.3 states that generally a waiver should not be secured on PPIAs. There are examples where these waivers are suggested such as where an asset will come into the taxpayer’s possession
- Under Code § 6331(i)(5), the statute of limitations is suspended when levies are prohibited and Code § 6331(k)(2) prohibits levies while an installment agreement is pending and for 30 days following rejection or termination.
Prior to collecting the tax, a statutory Notice and Demand for payment must be mailed by the IRS to the taxpayer. Section 6303 of the IRC sets forth that the Secretary shall, as soon as practicable, and within sixty days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount of tax owed and demanding payment thereof. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person’s last known address. It is important for the student attorney to make sure the IRS has complied with the notice and demand requirements. However, the failure of the IRS to send timely notice and demand after the assessment of the tax will not render the assessment void. The assessment will remain valid but IRS will be barred from utilizing its lien and levy collection powers. Blackston v. U.S., 778 F.Supp. 244 (D.Md.1991); see also Brewer v. U.S., 764 F.Supp. 309 (S.D.N.Y.1991) (stating that in order to place a lien against property, the IRS must make valid assessment of taxes, provide notice of deficiency to taxpayer, and provide notice and demand for payment of assessed tax).