How long do you have to claim a Refund?
I was watching a video, and the creator erroneously claimed that you have three years to file your taxes. I reviewed the comments and watched all of the people cyber high-fiving at this false information. It was painful. I’m here to set the record straight.
When do you have to file?
You are required to file your tax return generally by April 15th every year. If you cannot file your return, you must request an extension of time to file, which provides an additional 6 months to file your return. Filing the extension is requesting additional time to file your paperwork. It does not extend the payment deadline. There are no penalties for late filing when there is a refund. But this blog post isn’t about a tax bill, it’s about a refund.
Refund Statute Expiration Date
As I stated, the inspiration for this post came from a YouTube video. You are required to file your return on time every year (to include extension). If you don’t, you have three years to claim a refund. If you file an extension, the deadline is the extended due date. What does this look like?
Let’s assume you have not filed your 2021 tax return. The original due date for filing the 2021 tax return was Monday, April 18, 2022. One had to file the return or request an extension. Assuming you are due a refund on your 2021 tax return, the FINAL deadline to file your return to request a refund is April 15, 2025. If you file an extension, then the FINAL deadline would be October 15, 2025.
What happens if you don’t file within 3 years?
Let’s look at an actual example. A taxpayer filed his 2017 tax return late, and was due a refund. The original filing deadline for tax year 2017 was April 17, 2018. The taxpayer did not file an extension. The FINAL deadline for requesting the refund was May 17, 2021. Note: The normal deadline of April 15, 2021 was extended a month for Covid relief. The taxpayer did not file the return until November 30, 2021.
Once the Refund Statute expires (RSED), the IRS gets to keep your money. That’s it! Your refund becomes property of the Department of Treasury. There are generally no take-backs on this rule, unless there are extenuating circumstances. You have to be able to prove those circumstances. Even if you have past tax debt, you still do not get access to the refund to reduce the tax debt. This taxpayer 'donated' $3,141 to the Department of Treasury.
Here’s an example. This taxpayer had several unfiled years, and owed taxes for tax year 2015. They would have been due a refund for the 2017 tax return, which was filed in November 2021. The Refund Statute expired in May 2021, so the 2017 refund was NOT be applied to the 2015 tax debt.
I know what you may be thinking. If you OWE the government, they have 10 years to collect and there are penalties and interest! Yes, you are correct! You, however, only have 3 years to claim a refund.
If you learn nothing else from this post, file on time, even if you think you’re going to owe. If you have unfiled tax returns, reach out to us! We’re here to help!
Statute of Limitations
The Statute of Limitations is critical in the fight against the IRS. It is important to know which statute of limitations applies to your situation.
Definition
In general, the Statute of Limitations refers to the amount of time a party can take action from the time a situation occurred. The IRS has different statutes of limitations by which to abide. The date the statute of limitations ends is called the Statute Expiration Date.
3-year Audit Rule Statute of Limitations
The IRS generally has three years to audit your return. They can add more years if they find a substantial error, but usually no more than 6 years. The IRS can go back FOREVA if they suspect fraud or criminal activity.
Substantial Understatement of Income
The statute of limitations for audit is extended to six years if you omit (leave off) more than 25% of your gross income.
In tax year 2021, Jane earned $150,000, but only reported $110,000. The difference is $40,000 (~27% of $150,000). Since the difference is greater than 25%, the six year statute applies. Jack also earned $150,000, but reported $114,000, a difference of $36,000 (~24% of $150,000). The three year assessment would apply to Jack's situation since the difference is less than 25%.
Basis Overstatement
Congress decided in 2015 that basis overstatement produces an understatement of income, and extended the statute of limitations to six years vs. three years.
Example: Let’s assume you sell an investment property for $1 million. You claim your basis (the amount you invested) is $800,000, but it’s actually much lower at $250,000. The impact of your overstatement of basis is that you paid tax on $200,000, when you should have paid tax on $750,000. The IRS has 6 years to figure that out.
Refund Statute of Limitations
The Refund Statute Expiration Date (RSED) refers to the amount of time a taxpayer has to claim a refund. Generally, the refund statute of limitations is three years from the date a tax return is due OR within 2 years after the overpayment of tax.
Let’s assume you have not filed your 2017 tax return and you were due a refund. The 2017 tax return filing deadline was April 17, 2018. The last day to claim your 2017 tax refund was April 18, 2021. If the refund wasn't claimed by April 18, 2021, the statute of limitations has expired. You can no longer claim the refund. #Ewwww
Assessment Statute Expiration Date (ASED)
The IRS has three years from the time a return is filed to assess a tax. A tax assessment is the statutorily (by law) required recording of the tax liability. According to §6203, the assessment is made by recording the taxpayer’s name, address, and tax liability. In other words, the IRS has a required statute of limitations to record your tax within three years of the due date of your return, or from the time the return is filed (whichever is later). The Assessment Statute Expiration Date (ASED) on a tax return timely filed by Apr 15, 2022 is April 15, 2025.
Collections Statute of Limitations
The IRS generally has a statute of limitations of 10 years from the date the tax is assessed to collect a federal tax debt. The IRS has to write off any tax debt that's not paid by the end of the 10-year statute. It disappears like it never existed. There are situations that can toll (extend) the Collection Statute Expiration Date (CSED) - bankruptcy proceedings, for example.
Statute of Limitations on Unfiled or Fraudulent Returns
There is no statute of limitations on fraud. If you filed a fraudulent return, it’s as if you never filed a return at all.
Examples
- Tax preparers go to jail regularly for filing fraudulent returns on behalf of their clients. Sometimes the clients are aware. Sometimes they are not. Assume you are a victim of a preparer who filed a tax return containing fraudulent business losses to get you a bigger refund. Even though you may not have known the return contained fraudulent information, there is still no statute of limitations on the tax return. Theoretically, the IRS can find out about the return 10 years later, and still require the taxpayer to pay back any refund they were not entitled to receive.
- The statute of limitations never starts on a return that is never filed. The IRS may file a Substitute for Return (SFR), but that doesn’t count as a filed return either. The SFR doesn’t take into account any tax credits or deductions to which you may be entitled. The IRS uses the income reported by third parties and assesses the tax based on that. It’s important to note that filing an incomplete return, such as an unsigned return, does not count as filing a return.
The statute of limitations listed above are the most common statutes taxpayers experience. It’s important to know the statutes of limitations that apply to your situation. If you have received a letter from the IRS or have unresolved tax debt, reach out to us at 877.4TAX411 (877.482.9411).
