Statutes of limitation
| Situation | Assessment period |
|---|---|
| General rule | 3 years from the later of the due date or the filing date |
| Omission of more than 25% of gross income | 6 years |
| Fraudulent return or no return filed | Unlimited |
| Refund claim by taxpayer | Later of 3 years from filing or 2 years from payment |
The dispute path
- Examination — correspondence, office, or field audit
- 30-day letter — proposes adjustments and offers an Appeals conference
- Appeals Office — independent; settles based on hazards of litigation
- 90-day letter (statutory notice of deficiency) — the "ticket to Tax Court"
- Litigation
IMPORTANT: The U.S. Tax Court is the only forum where the taxpayer can litigate without first paying the disputed tax. To sue in the U.S. District Court or the Court of Federal Claims, the taxpayer must pay first and sue for a refund. The District Court is also the only forum offering a jury trial.
Key taxpayer penalties
| Penalty | Amount |
|---|---|
| Failure to file | 5% per month, max 25% (minimum applies if >60 days late) |
| Failure to pay | 0.5% per month, max 25% |
| Accuracy-related (negligence or substantial understatement) | 20% of the underpayment |
| Civil fraud | 75% of the underpayment attributable to fraud |
When failure-to-file and failure-to-pay both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty.
EXAM TIP: "Substantial understatement" for an individual generally means the understatement exceeds the greater of 10% of the tax required to be shown or $5,000. Reasonable cause and good faith is a defense to accuracy-related penalties — but never to fraud.