I have great news for you if you or your client owe the IRS. The IRS does not have forever to collect on that debt from your client! This means with your help they don't have to take that debt to the grave if they can't pay it. But here is the catch, you need to know how the tax law works to ensure that does not happen.
On the flip side, if the IRS owes your client, the client does not have forever to claim that refund. There are rules for how long the IRS has to assess tax on your client's account too! Yes, the IRS does have restrictions to their authority that they must abide by.
Understanding how these things work will make you the superhero to your client. It will also help you appropriately manage their expectations and help you avoid making empty promises. Today we're going to look at the ASED, CSED, and RSED and how they affect your client that owes back taxes.
Let me spell out each term for you first.
RSED - Refund Statute Expiration Date
What is the assessment statute expiration date (ASED)?
The assessment statute expiration date (ASED), as defined in the Internal Revenue Manual (IRM) is the last day the IRS can assess the tax to an account. What does this mean for your client? The IRS has a limited amount of time that they can say the client owes taxes for each tax year. This amount of time is typically three years from the date they received the original tax return. Or three years from the due date of the original return, whichever date is later.
There are exceptions to this rule. If the taxpayer agrees to allow the IRS to extend the date. This taxpayer does this by signing a statutory waiver or extension agreement. You can negotiate this proposed time or have your client refuse to sign the waiver.
There are two other reasons why the IRS can have more time to assess taxes for a tax year. The first reason is if the taxpayer omitted more than 25% of their gross income from a tax return. This extends the amount of time the IRS can assess additional tax from three to six years. They will also be looking at a hefty accuracy-related penalty. There is potential that you can abate this penalty for your client.
Reason number two is if the taxpayer filed a false or fraudulent return. There also must be an intent to evade tax. In this scenario, the IRS has an unlimited amount of time to assess tax on that tax year.
To protect their ability to assess tax on a year the IRS will file a substitute for return (SFR). The IRS does this assessment by using third-party documentation provided to them to create a return for the taxpayer. That way they can send a CP14 and collect that amount from the taxpayer.