IRS Blows Assessment Statute of Limitation, IRS Prohibited from Assessing Tax

Posted on April 02, 2018

The Tax Court has made a ruling that brings some clarity to the statute of limitation in certain filing situations.

In the recent case Hulett vs.Commissioner of Internal Revenue, the court held that the IRS did not act within the appropriate statute of limitation, prohibiting the IRS from assessing more tax in this case.

As you may know, the IRS has three years from the date of filing a tax return to propose more tax liability. If the IRS proposes more taxes outside the assessment statute of limitation, it can’t hold any of those liabilities against the taxpayer.

As with any rule, there are exceptions. Exceptions include:

  • If a taxpayer omits more than 25% of their income, the assessment statute of limitation grows to six years.
  • If the tax return is false or fraudulent, the IRS can assess tax liability against the taxpayer at any time.
  • If the taxpayer does not file a tax return, the assessment statute of limitation never begins to run.

In the case, the taxpayers filed federal tax returns on time for 2003 and 2004 with the the U.S. Virgin Islands Bureau of Internal Revenue. At the time, the taxpayers believed that they were only required to file their returns with this branch. They later learned that they were also required to file signed copies of their tax returns with the IRS in the United States. This process was never completed.Because of an information sharing agreement, the Virgin Islands provided the United States IRS incomplete copies of the taxpayers’ returns. The IRS in the United States used this information to populate IRS transcripts of account. This allowed the them to take steps to audit these tax returns.In the case, the taxpayers argue that the IRS should not have taken place, because the statute of limitation had already begun.

The U.S. Tax Court agreed, holding for the taxpayers. The Court noted that the United States IRS had enough information from the information sharing agreement to treat the returns as valid.

The court found that in this case the assessment statute of limitation began to run upon filing because:

  • The taxpayers’ effort to file returns in 2003 and 2004 with the V.I. Bureau of Internal revenue was in good faith
  • The taxpayers signed the returns in issue under penalties of perjury, and reported all their income and deductions.
  • The V.I. Bureau of Internal revenue sent copies of their tax returns to the IRS in the United States.

Since the statute of limitation had already began to run upon the original filing, the IRS cannot attempt to assess any more taxes against the taxpayers.

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