EP Examination Process Guide - Section 7 - Appeals - Statute Protections
This section provides a discussion of the statute of limitations on tax-exempt trusts, prohibited transactions, procedures used by the IRS when protecting a statute, and various publications about statutes.
The Internal Revenue Service (IRS) makes every effort to examine tax returns as soon as possible after they are filed. To ensure timely tax examinations, Congress has set deadlines for assessing taxes and making refunds or credit of tax. These deadlines are called statute of limitations. Without statute of limitations, a tax return could be examined and tax assessed, refunded, or credited at any time, regardless of when the return was filed.
Statutes of limitations generally limit the time the IRS has to make tax assessments to within three years after a return is due or filed, whichever is later. That particular date is also referred to as the statute expiration date. Statute of limitations will also limit the time you have to file a claim for credit or refund.
Congress, recognizing that additional time may sometimes be needed to fairly resolve a tax examination, has provided for extending the statutory period by written agreement between you and the IRS. These agreements, Form 872, Consent to Extend the Time to Assess Tax, are called "consents" and generally apply to all taxes except estate tax. Notification is usually made by sending Letter 907, with the most recently revised Publication 1035, Extending the Tax Assessment Period, and the applicable agreements.
Letter 907 advises the taxpayer they have the right to refuse to extend the limitation period, that the extension be limited to particular issues, and that the limitation period can be limited to a specific date.
There are two basic kinds of consents:
- the fixed-date consent and
- the open-ended consent.
The fixed-date consent, obtained by filing a Form 872, sets a specific expiration date for the extension of the statute, while the open-ended consent, obtained by filing a Form 872-A, Special Consent to Extend the Time to Assess Tax, extends the statute for an indefinite length of time, (90 days after either the taxpayer or the IRS sends the prescribed notice ending the agreement). If both parties agree, consent agreements may also limit further examination or appeal activities to specific tax issues. These agreements are called "restricted consents" and can have either a fixed or open-ended date of expiration.
A restricted consent is used to allow the assessment statute to expire on the normal or previously extended statute expiration date with regard to items on the return except those covered by the restrictive language.
If you choose not to sign the consent, the IRS will usually take the necessary steps to protect the government’s interest by ultimately assessing any tax determined to be owed. This process begins with the issuance of a Statutory Notice of Deficiency.
A Statutory Notice of Deficiency is not an assessment of tax nor does it require you to make immediate payment. It is a proposed deficiency which generally gives you 90 days, (150 days if the notice was addressed to a person outside the United States), to either agree to the deficiency or file a petition with the Court for a re-determination of the deficiency. During this period, you may ask Appeals to reconsider the case. The reconsideration does not extend the 90-day period you have for filing a petition with the Court. The Notice of Deficiency can only be rescinded under certain circumstances if both parties agree. Additional information concerning the Notice of Deficiency can be found in Publication 1035.
Generally, there are five types of tax returns over which the EP area has jurisdiction.
- Form 5500 series, Annual Return/Report of Employee Benefit Plan
Technically, the statute is being extended for the Form 1041, U.S. Fiduciary Income Tax Return. The Form 5500 series return is just an informational return but does govern the statute expiration date if the trust would lose its exempt status.
- Form 990-T, Exempt Organization Business Income Tax Return
A return for unrelated business income for a trust of a plan qualified under Internal Revenue Code (IRC) section 401(a).
- Form 5330, Return of Excise Taxes Related to Employee Benefit Plans
- Form 1040, U.S. Individual Income Tax Return
- Form 1120, U.S. Corporation Income Tax Return
A review of the statute of limitations for EP returns and the procedures for securing the extension of the statute of limitations is located in the Continuing Professional Education (CPE) Text for the Fiscal 2002 Year.