IRC Section 6501: Time Limits for IRS Tax Assessments

Taxpayers cannot be indefinitely exposed to the possibility of an audit or an additional tax bill for a past year. This concept of finality is codified in Internal Revenue Code (IRC) Section 6501, which provides a defined window for the IRS to review a return and assess more tax. This law establishes the specific time limits, known as the statute of limitations, for the IRS to make a tax assessment. An assessment is the formal recording of a tax liability on the IRS’s books. The purpose of this law is to create certainty for taxpayers, allowing them to eventually close their books on a given tax year.

The General Time Limit for Assessment

The standard rule for the IRS to assess additional tax is three years. This three-year period, often called the Assessment Statute Expiration Date (ASED), represents the normal window the IRS has to examine a tax return and propose changes. If the agency does not assess more tax within this timeframe, it is generally barred from doing so later.

The statute of limitations begins on the later of two dates: the date the tax return was actually filed or the tax return’s original due date. This rule prevents a taxpayer from shortening the review period by filing exceptionally early. For instance, if a personal tax return due on April 15 is filed on February 10, the three-year clock does not start until April 15.

Conversely, if a return is filed after the due date, the clock starts from the date of filing. For example, if a 2023 individual return was due April 15, 2024, but was filed with a valid extension on October 1, 2024, the three-year assessment period would begin on October 1, 2024.

For the statute of limitations to begin, a taxpayer must file a valid “return.” This means the document must be signed under penalty of perjury and contain enough financial data for the IRS to calculate a potential tax liability. A substitute return prepared by the IRS on behalf of a non-filing taxpayer does not start the clock.

Situations Extending the Assessment Period

While the three-year rule is the general standard, certain circumstances automatically give the IRS more time to conduct an audit and assess tax. The most common of these exceptions extends the statute of limitations to six years. This longer period is triggered when a taxpayer omits a substantial amount of gross income from their tax return. The government is granted this extra time because discovering an omitted item of income is considered more difficult than verifying a claimed deduction.

The six-year statute is specifically invoked if a taxpayer fails to report more than 25% of the gross income that was stated on the return. For example, if a taxpayer reported $100,000 in gross income but failed to include an additional $30,000 from a side business, they have omitted 30% of their income. Since this exceeds the 25% threshold, the IRS would have six years from the filing date to assess additional tax on the entire return.

For a business, gross income is not the same as gross receipts; it is gross receipts minus the cost of goods sold. An overstatement of basis is also considered an omission of gross income that can trigger the six-year statute. The statute of limitations is also extended to six years if a taxpayer omits more than $5,000 of gross income attributable to certain foreign financial assets.

Scenarios with No Time Limit

In a few serious cases, the statute of limitations does not apply, and the IRS can assess tax, penalties, and interest at any time in the future. The first exception is for filing a false or fraudulent return with the intent to evade tax. If the IRS can prove civil tax fraud, there is no time limit on assessing the tax due. The burden of proof for fraud is high and rests with the IRS, which must show that the taxpayer intended to conceal or mislead.

If fraud is proven for any part of the underpayment, the statute of limitations remains open for the entire tax return indefinitely. A second scenario is a willful attempt to evade or defeat tax in any manner. The third exception is simply failing to file a tax return. If a return is never filed, the assessment clock never begins to run. Filing the delinquent return, even many years late, will finally start the standard three-year assessment clock.

The statute of limitations can also remain open indefinitely if a taxpayer fails to file certain informational returns related to foreign assets.

Agreeing to Extend the Statute of Limitations

Separate from automatic extensions, a taxpayer and the IRS can mutually agree to give the agency more time to assess tax. This is a common procedure during an audit when the three-year statute of limitations is approaching its expiration date. The IRS may request this extension to allow its auditors sufficient time to complete their examination without having to issue a premature assessment.

A taxpayer is not required to agree to an extension. However, refusing to sign a consent will likely cause the IRS to issue a notice of deficiency based on the information it currently has, which may be incomplete and unfavorable to the taxpayer. Agreeing to an extension provides the taxpayer with more time to submit documents, answer questions, and negotiate with the auditor.

This mutual agreement is formalized using Form 872, Consent to Extend the Time to Assess Tax, which extends the statute of limitations to a specific date. Both the taxpayer and an authorized IRS official must sign the form before the original statute of limitations expires. An extension of the assessment period also extends the time a taxpayer has to file a claim for a refund.

In some cases, the IRS and taxpayer may use Form 872-A, Special Consent to Extend the Time to Assess Tax. This version extends the assessment period indefinitely. The extension remains in effect until either the taxpayer or the IRS sends a formal notice of termination or the IRS mails a notice of deficiency.