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2010-02-14 BACK
The Statute of Limitations and how it affects taxpayers
The Statute of Limitations and how it affects taxpayers This article originally appeared in the Texarkana Gazette on February 14, 2010 Dr. Terry Bechtel, Associate Professor of Accounting, Texas A&M-Texarkana, College of Business The Statute of Limitations and how it affects taxpayers Many taxpayers are unsure about how long they should retain supporting documentation such as receipts, bank records, and various statements received from financial institutions and mortgage companies. The statute of limitations, with regard to assessments, is of importance to taxpayers not only for this reason but for at least one other as well. It establishes the period of time that the Internal Revenue Service may examine a taxpayer's return and assess additional taxes due for a given tax year. It also generally establishes the period of time that a taxpayer may file an amended tax return for a given tax year. Generally, the statute of limitations is a three year period starting on the date the tax return is due or the date the tax return is actually filed, if the return is filed after the original due date of the return. Consider, for example, the typical case of a taxpayer who uses a calendar tax year. The due date for a calendar year ended December 31 is, in most cases, the following April 15. For example, if the taxpayer files his or her tax return for the 2009 calendar year any time between January 1, 2010 and April 15, 2010, the three year period would begin on April 15, 2010 and would end on April 15, 2013. On the other hand, if the return were not filed until August 1, 2010, the three year period would start on that date, instead of April 15, 2010, and the three year period would end on August 1, 2013. However, other longer statutory periods apply in several situations. If a taxpayer omits items of gross income from the return that exceed twenty five percent of the gross income stated on the tax return, the statute of limitations increases from the three year period previously discussed to a six year period. Therefore, if a tax return for the calendar year ended December 31, 2009 was filed anytime between January 1, 2010 and April 15, 2010, and had large omissions as previously noted, the statutory period would begin on April 15, 2010 but would not end until April 15, 2016. There is no statutory period for a fraudulent tax return. Fraud occurs where the taxpayer does three things. First, the taxpayer places a material item on their tax return or omits a material item from their tax return. Second, the taxpayer had knowledge that the item or items in question were incorrectly reported on the tax return. Third, the taxpayer intended to report the item or items incorrectly. The Internal Revenue Service has the burden of proof when fraud is alleged. Finally, the statute of limitations may be extended by mutual agreement of both the taxpayer and the Internal Revenue Service. A claim for a refund of overpayment of taxes by the taxpayer is, in most cases, to be filed within three years of the filing of the tax return or within two years following the payment of the tax, if this period expires on a later date. For example, consider a tax payer who filed their return for the 2006 calendar tax year on March 20, 2007 reflecting a tax liability of $11,000. Subsequently, on July 11, 2008 the taxpayer filed an amended 2006 return showing an additional tax due of $3,000, which was paid on that date. Then, the taxpayer files another amended return claiming a refund of $4,500. How much of a refund is the taxpayer entitled to? Since the refund claim was made more than three years after the tax return was filed, the taxpayer is limited to a recovery of only $3,000. The amount paid within the last two years. Other special periods apply to refund claims on items such as bad debts and worthless securities, net operating losses, capital loss carry backs, foreign tax credits, and certain carry backs of tax credits. The statutes of limitations previously discussed affect the taxpayer with regard to the retention of documentation as well as the filing of annual tax returns. Since a given tax year will generally close using the three year period, the wise taxpayer should retain complete documentation of the items of income and deductions found on the tax return for at least this period of time. However, one might, considering the possible longer period, also consider extending the period of document retention to six years. It should be again noted here that since the statutory period on assessments does not begin to run until a return is actually filed, a taxpayer desiring to have the statutory period run on a given tax year should make sure to file a return for that year, even if the taxpayer is not required by law to do so. Dr. Bechtel is Associate Professor of Accounting and can be reached at Terry.Bechtel@tamut.edu
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The Statute of Limitations and how it affects taxpayers
The Statute of Limitations and how it affects taxpayers This article originally appeared in the Texarkana Gazette on February 14, 2010 Dr. Terry Bechtel, Associate Professor of Accounting, Texas A&M-Texarkana, College of Business The Statute of Limitations and how it affects taxpayers Many taxpayers are unsure about how long they should retain supporting documentation such as receipts, bank records, and various statements received from financial institutions and mortgage companies. The statute of limitations, with regard to assessments, is of importance to taxpayers not only for this reason but for at least one other as well. It establishes the period of time that the Internal Revenue Service may examine a taxpayer's return and assess additional taxes due for a given tax year. It also generally establishes the period of time that a taxpayer may file an amended tax return for a given tax year. Generally, the statute of limitations is a three year period starting on the date the tax return is due or the date the tax return is actually filed, if the return is filed after the original due date of the return. Consider, for example, the typical case of a taxpayer who uses a calendar tax year. The due date for a calendar year ended December 31 is, in most cases, the following April 15. For example, if the taxpayer files his or her tax return for the 2009 calendar year any time between January 1, 2010 and April 15, 2010, the three year period would begin on April 15, 2010 and would end on April 15, 2013. On the other hand, if the return were not filed until August 1, 2010, the three year period would start on that date, instead of April 15, 2010, and the three year period would end on August 1, 2013. However, other longer statutory periods apply in several situations. If a taxpayer omits items of gross income from the return that exceed twenty five percent of the gross income stated on the tax return, the statute of limitations increases from the three year period previously discussed to a six year period. Therefore, if a tax return for the calendar year ended December 31, 2009 was filed anytime between January 1, 2010 and April 15, 2010, and had large omissions as previously noted, the statutory period would begin on April 15, 2010 but would not end until April 15, 2016. There is no statutory period for a fraudulent tax return. Fraud occurs where the taxpayer does three things. First, the taxpayer places a material item on their tax return or omits a material item from their tax return. Second, the taxpayer had knowledge that the item or items in question were incorrectly reported on the tax return. Third, the taxpayer intended to report the item or items incorrectly. The Internal Revenue Service has the burden of proof when fraud is alleged. Finally, the statute of limitations may be extended by mutual agreement of both the taxpayer and the Internal Revenue Service. A claim for a refund of overpayment of taxes by the taxpayer is, in most cases, to be filed within three years of the filing of the tax return or within two years following the payment of the tax, if this period expires on a later date. For example, consider a tax payer who filed their return for the 2006 calendar tax year on March 20, 2007 reflecting a tax liability of $11,000. Subsequently, on July 11, 2008 the taxpayer filed an amended 2006 return showing an additional tax due of $3,000, which was paid on that date. Then, the taxpayer files another amended return claiming a refund of $4,500. How much of a refund is the taxpayer entitled to? Since the refund claim was made more than three years after the tax return was filed, the taxpayer is limited to a recovery of only $3,000. The amount paid within the last two years. Other special periods apply to refund claims on items such as bad debts and worthless securities, net operating losses, capital loss carry backs, foreign tax credits, and certain carry backs of tax credits. The statutes of limitations previously discussed affect the taxpayer with regard to the retention of documentation as well as the filing of annual tax returns. Since a given tax year will generally close using the three year period, the wise taxpayer should retain complete documentation of the items of income and deductions found on the tax return for at least this period of time. However, one might, considering the possible longer period, also consider extending the period of document retention to six years. It should be again noted here that since the statutory period on assessments does not begin to run until a return is actually filed, a taxpayer desiring to have the statutory period run on a given tax year should make sure to file a return for that year, even if the taxpayer is not required by law to do so. Dr. Bechtel is Associate Professor of Accounting and can be reached at Terry.Bechtel@tamut.edu
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