The IRS has open and closed tax years. What exactly does that mean, and how does it apply to you?
An open tax year is a period after the deadline of a tax return where you can still pursue a refund. It is also a period where the IRS can still analyze your tax return in greater detail, including performing an audit.
It is a good idea as a taxpayer to make yourself aware of open and closed tax years for your knowledge, as well as to make sure you have received all your refunds.
Open Tax Year vs. Closed Tax Year
“Open tax year” and “closed tax year” are terms that are widely used by tax professionals. It is important to know what an open tax year is because of the value it holds pertaining to your refund and how long you have left to file for your return.
In an open tax year, the IRS can still access additional tax and/or the taxpayer can file a timely claim for credit or refund of an overpayment in tax.
The period this can still happen is three years after the initial date of the original deadline.
For example, a 2017 tax return is due on April 15, 2018. Let’s say you submit the tax return on March 17, 2018. Now you add three years to that submission date to determine when the return changes from an open to a closed tax year:
- March 18, 2018 to March 18, 2021 = Open Tax Year for 2017 Return
- March 19, 2021, and after = Closed Tax Year for 2017 Return
In other words, the open tax year is the amount of time you have until a refund expires. Once the tax year becomes closed, the statute of limitations for claiming a refund has expired.
However, taxpayers can file for an extension, which will extend the period of claiming refunds and will give you extra time past the traditional three years.
There are some exceptions to the three-year statute of limitations, such as situations in which taxpayers are unable to manage their finances due to physical or mental impairments and taxpayers who have seven years to claim a refund because of deductions for bad debt or worthless securities.
What Tax Years are Still Open?
An open tax year presents taxpayers with more rights and privileges. It also gives the IRS more control to pursue action against you. It is important to protect yourself during open tax years against the IRS because the period of limitations has not expired.
The period of limitations provides two important privileges:
A) It allows taxpayers to still file a tax return, claim, or seek a refund of an overpayment in tax.
B) It allows the IRS to assess additional tax.
Once a tax year becomes closed, the period for assessment or refund has expired. Therefore, an IRS refund after three years is invalid. Consequently, making yourself aware of open tax year deadlines helps you stay in good standing with the IRS and receive any missing refunds.
IRS Statute of Limitations (SOL)
It is vital to understand that the real implications of the statute of limitations for a tax year generally get misunderstood.
While it is true that no tax money can change hands between the IRS and the taxpayer once a tax year becomes closed, it does not mean that the IRS can no longer review or analyze the tax year. Therefore, the IRS still may recalculate your correct tax liability through an audit or via other means.
The general rule is you can’t get audited after three years. However, all the IRS legally needs to do after the three years is to claim that a significant error is identified to reopen the case. As a result, it may audit returns filed longer than three years, so keeping important information and documentation longer than the open tax years is advisable.
The IRS can conveniently bypass the traditional three-year rule by claiming the case falls under the description of fraud. The IRS also has similar privileges when it comes to dealing with back tax returns. Additional taxes get assessed in the form of an audit or an under-reported notice (known as a CP2000).
However, in most instances, the IRS will leave you alone after the three-year statute of limitations. The IRS generally uses its “examination cycle” to determine who gets audited, and that usually falls under the first 26 months after the return gets filed.
After that, you are traditionally safe from the IRS, though we mention the other possible outcomes to make sure you are completely protected and aware.
Understanding the Process of IRS Audits
Every taxpayer is afraid of getting audited, yet the reality is fewer and fewer taxpayers are getting targeted by the tax agency. Regardless, it is still advisable to prepare for a rainy day in the form of a tax audit.
The IRS usually performs audits within a few months to a year of filing your return. While they have up to three years, the IRS is concerned with settling audits as soon as possible.
When the IRS performs an audit, it essentially freezes your refunds. Since the IRS must pay interest on refunds that it pays late, the agency is concerned with paying them back as soon as possible.
Mail audits are the quickest and least invasive way to clear up concerns about your return, and usually revolve around tax credits or deductions that you claimed. If you can back up claims with evidence, the issue normally gets resolved quickly and relatively easily.
The more comprehensive audits, like field audits, traditionally start the process within the first year though, once again, keep in mind the agency legally has up to three years.
Levy & Associates Represents Taxpayers
Levy & Associates wants to protect hard-working individuals that get stuck with an IRS audit. Once you receive a correspondence letter from the agency that indicates you got selected for an audit, it is easy to get stressed and worried.
However, IRS audits are part of the agency and do not always indicate that you did something wrong. Often the agency needs clarification and further information about a tax credit or deduction.
Reach out to Levy & Associates for your audit defense. It is very helpful and advantageous to have professional help on your side. By scheduling an initial free consultation, we can examine your case and provide ways we can assist you with the matter.
Talk to us today by calling 800-TAX-LEVY or visiting www.www.levytaxhelp.com