An Overview of the Assessment Statute of Limitations

This provision protects taxpayers from IRS assessments

The assessment statute of limitations (ASOL) helps to provide finality to a tax period; once it has closed, it prevents the IRS from assessing additional tax for that period. Many practitioners do not realize that this also prohibits the IRS from assessing tax in response to a taxpayer’s amended tax return. See Internal Revenue Manual 25.6.1.9.9.1(8) (07-09-2021).

Once the IRS receives an original or amended tax return, it reviews the information on the return and assesses tax based on that information provided under §6201(a)(1). Once the tax is assessed, the taxpayer legally owes that tax amount, and the IRS sends notice and demand for payment under §6303(a).

Assessment Period

Under §6501(a), the IRS can generally only assess tax within three years after the return is filed. A return is filed when it has been physically delivered to the correct IRS office; see Fowler v. Comm., 155 T.C. 7 (2024). Thus, when filing a tax return on paper, it must be sent to the address in the form instructions, or the ASOL may never begin.

In Seaview Trading v. Comm., T.C. Memo. 2019-122, aff'd 2023 PTC 55 (9th Cir. 2023), the Tax Court and the Ninth Circuit Court of Appeals held that faxing a return to a revenue agent and mailing a return to IRS Chief Counsel did not start the ASOL. Therefore, if an IRS employee asks a taxpayer to file an original return with them, do not do it - file it electronically or by mail to the proper service center, and give the employee a copy of the return filed.

In addition, the return must also be the return required to be filed by the taxpayer; simply put, it must be a valid tax return. To determine whether a return is sufficient to start the ASOL, the law considers four factors known as the Beard test (from Beard v. Comm., 82 T.C. 766 (1984)):

1. There is sufficient data to calculate tax liability,

2. The document purports to be a return,

3. The return must be an honest and reasonable attempt to satisfy the requirements of the tax law, and

4. The taxpayer must execute the return under penalties of perjury.

In Fowler v. Comm., 155 T.C. 7 (2020), the Tax Court held that an electronically filed return rejected due to the lack of an Identity Protection PIN (IP PIN) was a valid return under the Beard test and started the ASOL. Therefore, it is possible for an electronically filed return that is rejected to have started the ASOL if it otherwise meets the Beard requirements.

For purposes of the ASOL, the original tax return filing date starts the ASOL; this is not affected by a later filed amended or superseding return. Chief Counsel Advice 202026002 provides a detailed discussion referencing Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934) and Badaracco v. Comm., 464 U.S. 386 (1984).

Once the IRS issues a notice of deficiency (NOD), the ASOL is tolled until 60 days after either the Tax Court's decision or the 90-day NOD period ends. Therefore, the IRS must generally issue the NOD before the ASOL expires to preserve its right to assess tax for that period.

Extended Assessment Period

The ASOL is six years from the date the return was filed under §6501(e)(1)(A)(i) if there was a substantial omission of income, which is an omission of gross income of more than 25% of the amount shown on the return. Gross income for purposes of the ASOL provision is the total amount received or accrued before the cost of goods reduction sold or ordinary and necessary expense deductions. An overstatement of basis can constitute an understatement of gross income.

Under §6501(e)(1)(B)(iii), an omitted amount will not be included in this calculation if the amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the Secretary of the nature and amount of such item. While Form 8275, Disclosure Statement, may be used, it does not have to be used; the Tax Court will consider the entire return and all documents accompanying the return. This issue is discussed in Schlapfer v. Comm., T.C. Memo. 2023-65.

A return that omits more than $5,000 of income from a §6038D asset also triggers a six-year ASOL under §6501(e)(1)(A)(ii).  A §6038D asset is one that is reportable on Form 8938, Statement of Specified Foreign Financial Assets, regardless of whether the taxpayer has a Form 8938 filing requirement.

Unlimited Assessment Period

There is no ASOL in the following situations; therefore, the IRS has unlimited time to assess tax:

• Unfiled returns (§6501(c)(3))

• §6020(b) substitute for return assessments (§6501(b)(3))

• False or fraudulent returns (§6501(c)(1))

• Willful attempt to evade tax (§6501(c)(2))

• Failure to file certain international information returns (§6501(c)(8)

Filing an original return or the omitted international information return will cause the ASOL to start. However, under Badaracco, an amended return will not start the ASOL in the case of an original fraudulent return.

The Tax Court has held that fraud committed by a tax preparer causes the ASOL not to start for the taxpayer. See Allen v. Comm., 128 T.C. 37 (2007) and Murrin v. Comm., T.C. Memo. 2024-10.

Example

May filed her 2017 Form 1040 on May 17, 2021 (the day the IRS received the delinquent tax return). The IRS has until May 17, 2024 to issue a NOD proposing to assess additional tax. In addition, after May 17, 2024, if May files Form 1040-X showing additional tax, the IRS will not process the amended return.

If May has a substantial omission of gross income on the original Form 1040, the IRS has until May 17, 2027 to issue a NOD proposing to assess additional tax.

Join the Conversation

As a paid subscriber, you can discuss this topic in the comments section. Please keep the discussion related to this edition’s topic.

Learn More About Tom

Please take a look at my Linktree to learn about the educational opportunities I offer the tax professional community.