Statute of Limitations

You have 3 years to claim a tax refund.

This is measured from the original deadline of the tax return, plus three years. For example, your 2010 tax return is due on April 15th, 2011. Add three years to this filing deadline, and you have until April 15th, 2014, to file your 2010 tax return and still get a tax refund. If you file your 2010 return after April 15th, 2014, then your refund “expires.” It goes away forever because the statute of limitations for claiming a refund has closed.

If you already filed a tax return, you have three years from the date you filed your return to claim any additional refunds by sending in corrections with an amended return. If you filed your return before April 15th, the three-year period begins from April 15th.

Filing an extension may extend the period for claiming refunds. Under code section 6511(b)(2)(A), the IRS can issue refunds for a particular year if you requested an extension and subsequently file a tax return within three years from the extended deadline.

 

The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.

This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. We could utilize the same example as in the refund situation: the IRS has until April 15, 2014, to audit a 2010 tax return filed on or before April 15, 2011. After the three-year audit time period has expired, the IRS cannot initiate an audit of your tax return unless there is a suspicion of tax fraud. Most state tax agencies follow the federal three-year period for auditing tax returns; however some states have a longer statute of limitations.

 

The IRS has 10 years to collect outstanding tax liabilities.

This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn’t collect the full amount in the 10-year period, then the remaining balance on the account disappears forever because the statute of limitations on collecting the tax has expired.

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Selecting IRA Accounts

IRA’s still remain one of the few ways the majority of taxpayers can use to shelter income from taxation.  Selecting the appropriate IRA given the taxpayer’s tax related goals will be an important step in building wealth.  The traditional IRA allows a current year income tax deduction, making the funding to the IRA less expensive after tax.  When money is withdrawn from the traditional IRA, the distribution is included in income and taxes may be due.   A taxpayer who funds a ROTH IRA gets no current tax deduction, but the money will come out free of tax if certain parameters are met on the distribution.  Planners have differing views on which IRA is best long term.  We like to get the upfront tax deduction with a traditional IRA and believe that the tax law could potentially change regarding ROTH distributions as it did with Social Seurity benefits.  Such benefits used to be tax free, now 85% of Social Security benefits is often taxed.  With Washington DC out of money, it would not surprise us to see the ROTH benefits tax free advantage change.  As always, it is best to run long term projections before deciding on your retirement plan of action regarding IRA’s.