2022-07-08
The IRS may ask the taxpayer to extend the statute of limitations on assessment of additional tax during a tax audit if the statute of limitations is about to run out.
This is a complex situation, so consultation with an adviser is recommended.
While the taxpayer may have a natural urge to decline the request, each taxpayer’s facts and circumstances must be considered when deciding whether to agree to an extension, and it may be in taxpayers’ interest to extend the statute of limitations.
Generally, the IRS has three years from the date a taxpayer files a return to assess tax. In some circumstances, the IRS has six years to assess tax, and in a fraudulent return, attempt to evade tax, or failure to file a return, tax may be assessed at any time. The period to assess tax may also be extended by agreement of the taxpayer under IRC Section 6501(c)(4).
Extending the statute is likely going to be the preferred course of action to avoid having to file a petition in US Tax Court and involvement of the IRS Office of Chief Counsel.Granting an extension can also confer advantages in the IRS Independent Office of Appeals.
if a taxpayer does not to consent to a statute extension, the IRS will assess the tax it determines to be due (likely the highest amount the IRS can justify). To contest the additional tax at this point, the taxpayer must file a petition in Tax Court without having to pay the additional tax assessed, or pay the tax due and file a refund claim with the IRS, and if the refund claim is not allowed, file suit in US District Court or the Court of Federal Claims.
Taxpayers have the burden of proof on most issue in Tax Court, so the IRS tends to have an advantage. Also, failing to extend the statute can be construed as a failure to cooperate, impacting taxpayer’s ability to shift the burden of proof under IRC Section 7491 and claim administrative and/or litigation costs under IRC Section 7430. Litigation can be costly, with attorneys’ fees and expensive discovery requests, and take a long time to resolve.
It might make sense to decline an extension request if an examination is taking years to complete and a taxpayer believes they have provided necessary information to the IRS. A professional might advise declining a statute extension if it appears that the IRS is searching for additional issues, which will force the IRS to bear the burden of proof on any new issue the IRS seeks to raise in Tax Court.
Taxpayers may also benefit from declining a statute extension in an incomplete examination. If the IRS is taking exceedingly long to develop a case and has failed to do so, declining the second or third extension request places the IRS in a difficult position. The IRS must either drop its case or develop it through discovery and Tax Court litigation.