Generally, the IRS has three years from the date a taxpayer files a return to assess tax. In some circumstances, the agency has six years to assess tax. In the event of a fraudulent return, an 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).
If the IRS is conducting an audit and the statute is about to run out, it will usually solicit an extension—even for routine, mundane issues. While the taxpayer may have a natural urge to decline such a request, that’s not always the right move. Each taxpayer’s facts and circumstances must be considered when deciding whether to agree to an extension.
A professional can guide you through this decision, but for the average taxpayer, extending the statute is likely going to be the preferred course of action, mainly because taxpayers will want to avoid US Tax Court and the involvement of the Office of Chief Counsel. Additionally, granting an extension can confer advantages in the IRS Independent Office of Appeals.
Tax Court and Chief Counsel Involvement
Generally, if a taxpayer chooses not to consent to a statute extension, the IRS will take steps to assess the tax it determines to be due. At this point, if the taxpayer wishes to contest that assessment, they must file a petition in tax court. Taxpayers could also pay the tax due and file a refund claim in district court or the Court of Federal Claims.
The IRS tends to have an advantage in tax court because taxpayers have the burden of proof on most issues. Moreover, failing to extend the statute could be construed as a failure to cooperate, which may impact the ability to shift the burden of proof under IRC Section 7491 and claim administrative and/or litigation costs under IRC Section 7430.
Besides the time and stress of litigation, there are other reasons taxpayers may want to avoid tax court. It tends to be costly, with attorneys’ fees and expensive discovery requests. And once a case is docketed in tax court, the Office of Chief Counsel becomes involved. Chief counsel attorneys are well resourced and quite willing to try cases. They are used to representing the IRS’s position in court and are generally its best advocates. Chief counsel attorneys may also be circumscribed in their ability to settle a case, whereas an appeals officer does not have this limitation.
A case docketed in tax court in this fashion usually must also be referred to Appeals for settlement consideration. In certain circumstances, however, the case may be pulled out of Appeals and into tax court before the taxpayer has a full opportunity to be heard in Appeals. The process for docketed cases in Appeals tends to be more favorable to the IRS, as there are no prohibitions on ex parte communications.
Appeals Advantages of Agreeing to Extend
If a taxpayer agrees to extend the statute of limitations, there are several advantages to being in Appeals in this non-docketed fashion:
- Chief counsel generally is not involved in the appeals process, especially for those taxpayers that do not fall under the purview of the Large Business and International Division (LB&I).
- Chief counsel attorneys usually will be excluded from settlement conferences in Appeals.
- Appeals employees and those in other IRS functions, such as examination, are generally prohibited from ex parte communication (communication without the taxpayer or their representative present). This prohibition extends to attorneys from the Office of Chief Counsel, preventing them from advocating for the IRS’s position without the taxpayer being present.
When It Might Make Sense to Decline to Extend
Taxpayers are advised to work with a professional to understand whether declining to extend works in their situation. Typically, declining only makes sense for LB&I taxpayers, or those that can afford to file a petition in tax court and have a competent adviser who can navigate the docketed appeals process. Keep in mind that the docketed appeals process will include an attorney from the Office of Chief Counsel advocating for the IRS, and it tends to be more favorable to the agency.
If an examination is taking years to complete and a taxpayer believes they have provided necessary information to the IRS, it might make sense to decline an extension request. If the IRS has what it needs to make a determination, and the taxpayer believes the IRS is searching for additional issues, a professional might advise declining a statute extension. This will force the IRS to bear the burden on any new issue it seeks to raise in tax court.
Another instance where declining a statute extension may benefit the taxpayer is 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.
Until a judge is assigned or the case is placed on a trial calendar, IRS discovery is constrained.
- Although the IRS can seek information and documentation via informal means, if the taxpayer fails to respond, the tax court will not rule on a motion to compel a response.
- The IRS cannot issue subpoenas for documents from third parties.
- The taxpayer must consent to any third-party depositions.
Meanwhile, such a case will also be docketed in Appeals, which will proceed with settlement consideration without waiting for the IRS to develop its case. In addition, if the IRS is quite far behind in its examination, despite extensions, the taxpayer may be able to argue that there is no basis for an adjustment to taxes paid. This may make a favorable Appeals settlement more likely.
This is a complex situation, so consultation with an adviser is recommended. But for taxpayers with the resources to engage in discovery disputes with the IRS, declining to extend the statute for cases not fully developed can be a worthwhile strategy.
What’s in the Taxpayer’s Best Interest
There are few situations where the taxpayer benefits from declining an IRS request to extend the statute. For the majority of taxpayers, it is likely in their interest to extend the statute when requested.
Decisions about whether to grant an extension request are taxpayer-specific. Taxpayers considering such requests are advised to seek advice from a professional who specializes in federal tax resolution.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Michael Kramarz is the director of federal tax resolution at Kaufman Rossin, specializing in representing taxpayers before the IRS. Prior to joining Kaufman Rossin, he was a special trial attorney with the Large Business and International Division of the IRS Office of Chief Counsel.
We’d love to hear your smart, original take: Write for Us