Six Year Irs Statute Limitations

6-Year Statute of Limitations: Understanding IRS Rules

The 6-year statute of limitations is a provision in the U.S. tax code that extends the time the IRS has to assess additional taxes in certain cases. While the standard statute of limitations for most taxpayers is three years, this longer period applies under specific circumstances, often involving substantial omissions of income. Knowing the rules can help you understand your rights and responsibilities as a taxpayer.

What is the Statute of Limitations?

The statute of limitations is the time frame within which the IRS can assess additional taxes or a taxpayer can file an amended return to claim a refund. For most tax returns, the IRS has three years from the date of filing to assess additional taxes. However, certain situations trigger an extension to six years.

When Does the 6-Year Statute of Limitations Apply?

The IRS has six years to assess additional taxes if any of the following conditions are met:

• Substantial Omission of Income: If you fail to report more than 25% of your gross income on your tax return, the 6-year rule applies.
• Foreign Financial Assets: If you omit certain income related to foreign financial assets exceeding $5,000, the IRS has six years to assess taxes.
• Basis Overstatement: If an overstated basis in property results in underreported income exceeding 25% of gross income, the 6-year rule applies.

Examples of Substantial Omission

To illustrate how the 6-year statute works:

• If you report $60,000 in gross income but fail to include $20,000, the omitted income exceeds 25%, triggering the 6-year limitation.
• If you own foreign accounts generating $6,000 in income that you did not report, the IRS has six years to investigate.

What Doesn’t Trigger the 6-Year Statute?

Certain actions do not extend the statute of limitations to six years:

• Errors or omissions below 25% of gross income.
• Non-material mistakes or clerical errors.
• Underreporting related to expenses or deductions (unless tied to income omissions).

Taxpayer Rights Under the Statute

As a taxpayer, you have rights and obligations under the statute of limitations:

• Timely Record-Keeping: Maintain accurate records for at least six years if you think you might fall under the extended statute.
• Amending Returns: You can file an amended return within three years to claim a refund or within two years of paying additional tax, whichever is later.
• Consult a Professional: Seek advice from a tax professional to determine your exposure to the 6-year rule.

Tips for Staying Compliant

• Disclose all income accurately, including foreign and investment income.
• File FBAR and FATCA forms if you have foreign financial assets exceeding reporting thresholds.
• Review tax returns thoroughly to ensure accurate basis reporting for property sales.

What Happens After Six Years?

After six years, the IRS cannot assess additional taxes for the applicable tax year unless:

• You file a fraudulent return.
• You fail to file a return altogether.
• You consent to an extension of the statute.