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. Remember that the SNOD allows 90 days to appeal to the Tax Court, so the bear will want to send you that SNOD at least 91 days out, allowing that last day to record it (that is, assess you). The bear will not cut it that close, but you get the idea.
His client has extended the statute until February. Working backward 90 days, the IRS would have to wrap up the audit, go through its notices and send the SNOD no later than some day in November. It is late August as I write this. The bear would have approximately 3 months to react if the client refuses to extend the statute again.
What are the odds the IRS machinery, especially in 2015, will work in such a constrained time frame?
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.
About the author
Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.