IRS Extension Form 872 on Assessment

 Statute of limitations can be tricky things. Many times clients cannot believe that there is actually a limit to when IRS can take action. But we lawyers know, or at least we should know, that various time limitations apply in ordinary tax administration.  For assessment, that is the time during which IRS must send a bill to a taxpayer or at least a statutory notice of its proposed tax bill is limited under three rules. The general rule is that action must be taken within three years from the due date of a return or its actual filing if filed later. That period is extended to six years if there has been a non-fraudulent that is negligent omission of at least 25% of the gross income stated on the return. For those cases where the IRS can prove fraud the statute of limitation is theoretically and legally open forever. That too is the case if no return is filed although practical tax administration does and must enter into the picture. In collection matters the tax world before 1998 permitted IRS revenue officers to keep the otherwise ten year statute of limitations open almost indefinitely by requesting extensions of the collection statute of limitations. Often taxpayers were arm twisted into giving these extensions under threat of immediate levy action. Since 1998 the practice of extending statutes of limitations on collection is limited to specific situations. Also, there may be instances based on the taxpayer’s conduct for example leaving the country or filing a bankruptcy, an offer in compromise or other appeal with the IRS which will have the effect of extending the statute of limitations on collection. But even with the reform legislation of 1998, IRS is still permitted to request an extension of the statute of limitations on assessment. This may be to the mutual benefit of both the taxpayer and IRS examining agent. The agent obtains more time to complete his audit; the taxpayer gets additional opportunity to submit documents and verification. It is within the control of the taxpayer to file an extension and as a matter of fact negotiation is proper to determine to what date the extension will be granted. If a taxpayer refuses to give an extension of the statute of limitations on assessment the IRS agent will be forced to issue a statutory notice in order to protect the right of IRS to assess. In this way some arm twisting may be evident. The taxpayer whose sins may not as yet have been discovered by an agent may stand his ground on refusal hoping to find a way of avoiding as yet an expanding problem as the statutory notice issuance moves the case forward in tax administration. The strategy for extensions take up pages in tax procedure books( as it does in my own) Once that notice is issued a taxpayer can always pay the tax and end further examination or seek redress before payment in the United States Tax Court. Now every then and again an extension Form 872 designed to extend a three-year statute of limitations on assessment contains a critical typographical error. In Kunkel 7^th Cir. the taxpayer and the IRS agreed to an extension of the three-year assessment. But when the form was executed the wrong tax years were entered. The taxpayers claimed that the 872 was invalid and that the time for assessing the tax had lapsed. This form is a contract and the appeals court applying contract rules determined that the parties had intended all along to extend the examination time period. Both had just missed the typographical error. The extension was deemed valid.