Recently I
received a call from another CPA.
He is
representing in a difficult tax audit, and the IRS revenue agent has requested
that the client extend the statute of limitations by six months. The statute
has already been extended to February, 2016, so this extension is the IRS’ second
time to the well. The client was not that thrilled about the first extension,
so the conversation about a second should be entertaining.
This however
gives us a chance to talk about the statute of limitations.
Did you know
that there are two statutes of limitations?
Let’s start
with the one commonly known: the 3-year statute on assessment.
You file
your personal return on April 15, 2015. The IRS has three years from the date
they receive the return to assess you. Assess means they formally record a
receivable from you, much like a used-car lot would. Normally – and for most of
us – the IRS recording receipt by them of our tax return is the same as being
assessed. You file, you pay whatever taxes are due, the IRS records all of the
above and the matter is done.
Let’s introduce some flutter into the system: you are selected for audit.
They audit
you in March, 2017. What should have been an uneventful audit turns
complicated, and the audit drags on and on. The IRS knows that they have until
April, 2018 on the original statute (that is, April 15, 2015 plus 3 years), so
they ask you to extend the statute.
Let’s say
you extend for six months. The IRS now has until October 15, 2018 to assess (April
15 plus six months). It buys them (and you) time to finish the audit with some
normalcy.
The audit
concludes and you owe them $10 thousand. They will send you a notice of the
audit adjustment and taxes due. If you ignore the first notice, the IRS will
keep sending notices of increasing urgency. If you ignore those, the IRS will
eventually send a Statutory Notice of Deficiency, also known as a SNOD or
90-day letter.
That SNOD
means the IRS is getting ready to assess. You have 90 days to appeal to the Tax
Court. If you do not appeal, the IRS formally assesses you the $10 thousand.
And there is
the launch for the second statute of limitations: the statute on collections. The
IRS will have 10 years from the date of assessment to collect the $10 thousand
from you.
So you have two
statutes of limitation: one to assess and another to collect. If they both go
to the limit, the IRS can be chasing you for longer than your kid will be in
grade and high school.
What was I discussing
with my CPA friend?
- What if his client does not (further) extend the statute?
Well, let’s
observe the obvious: his client would provoke the bear. The bear will want to
strike back. The way it is done – normally – is for the bear to bill you
immediately for the maximum tax and penalty under audit. They will spot you no
issues, cut you no slack. They will go through the notice sequence as quickly
as possible, as they want to get to that SNOD. Once the IRS issues the SNOD, the statute of limitations is tolled, meaning that it is interrupted. The IRS will then not worry about running out of time - if only it can get to that SNOD.
It is late August as I write this. The statute has already been extended to February. What are the
odds the IRS machinery will work in the time remaining?
And there
you have a conversation between two CPAs.
I myself
would not provoke the bear, especially in a case where more than one tax year
is involved. I view it as climbing a tree to get away from a bear. It appears brilliant
until the bear begins climbing after you.
I suspect my friend’s client has a
different temperament. I am looking forward to see how this story turns out.
