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When you can claim a refund and how long the IRS can audit you

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Tax Tip IconApril 15 is an important day not only because income taxes are due but because it serves as a marker for setting statutes of limitation on how long you can claim a credit or refund, and how long the IRS can schedule an audit. It’s also the date when you must have paid 90% of your tax liability through withholding, estimated payments and any other payment method, if you file for an extension.

 

Automatic, six-month extensions for tax filing are easily obtained, and millions of taxpayers get an extension each year. The IRS doesn’t mind if you file for an extension. To file, use Form 4868. Doing so will give you some breathing room to get your financial affairs in order to complete a return.


When, and if, you file a return affects the audit period

Failing to file a tax return for any year means the IRS can schedule an audit for that year at any time in the future. The statute of limitations — the period of time within which the IRS can audit a taxpayer — never runs if the taxpayer never filed a return. Otherwise, the statute of limitations is three years from the date the return was filed or the date it was due, not including the extension period. If you file your return early, the law says the statute of limitation begins on the date the return was due.

 

For example, assume a taxpayer filed a 2010 tax return on April 1, 2011. Generally, on April 16, 2014, the IRS can no longer audit the 2010 tax year because it has been more than three years since the return was due or was filed. If that same taxpayer never filed a return in 2011 for the 2010 tax year, the IRS could audit that individual even 50 years from now.

 

What if that same taxpayer filed a 2010 tax return on April 1, 2014? The IRS would generally have until April 1, 2017, to examine the taxpayer’s 2010 tax return. It’s not the best situation for the taxpayer, but at the very least a return has been filed and the clock has started to run.

 

Of course, there are exceptions to when the statute of limitations begins to run other than a taxpayer’s failure to file a return. The statute of limitations doesn’t run for false or fraudulent returns, returns filed with the intent to evade taxes and in other limited circumstances.

 

Inadvertent missed filings
Sometimes a taxpayer can unknowingly miss a tax filing. Inadvertent failures to file will still keep the statute of limitations from running.

 

A commonly missed filing is that of Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” The rules about who must file this form are complicated. Generally, officers, directors and some shareholders of foreign corporations that have certain levels of ownership by U.S. taxpayers must file Form 5471, which reports to the IRS the financial information of the foreign company. The IRS uses this data to ensure that income earned abroad is properly reported, and taxes paid, by those officers, directors and shareholders.

 

Failure to file Form 5471 and certain other information returns can cause your entire tax return to stay open — not just the portion that relates to income earned from that foreign corporation. The IRS can be understanding to those taxpayers who file those forms late, and can grant relief to taxpayers who have “reasonable cause.”

 

Rules to get your refund
The rule to claim a credit or refund for overpaid taxes is similar to the rule for the assessment of tax. A taxpayer generally has three years from the time the return was filed, or two years from the time the tax was paid (whichever expires later) to claim a credit or refund. If you file your return late, you can still claim a refund but in that case, you may be limited to amounts paid within three years of filing, plus the period of any extension.

 

Each year the IRS tries to refund money to taxpayers who did not file a tax return. This year, the IRS announced that close to 1 million taxpayers did not file an income tax return for 2010 and were owed almost $760 million in refunds. The statute of limitations for refunds, as described here, ends on April 15, 2014, for those missed 2010 returns.

 

The lesson? You can’t get a refund if you never filed your return. What you can get, however, is an audit at any time. Contact a Grant Thornton professional to learn more about your options.

 

Contact
David Auclair
202.521.1515
david.auclair@us.gt.com

 

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This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax professional to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

 

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.