The budget impasse has suspended audits conducted by the Internal Revenue Service (“IRS”) and cases currently being litigated before the United States Tax Court. This will undoubtedly be a huge opportunity for a number of taxpayers being audited by the IRS. Taxpayers must keep in mind that the Internal Revenue Code provides that the IRS must generally assess any internal revenue tax within a three-year period beginning with the date a tax return is filed. If the IRS fails to timely make an assessment against a taxpayer being audited, the Internal Revenue Code will forever foreclose the IRS’ ability to assess an additional tax liability against the taxpayer being audited.
Given this relatively short statute of limitations that the IRS has to assess tax liabilities against taxpayers, in certain cases, the current government shutdown can likely be used effectively as a defense in an IRS audit. For example, suppose the IRS was auditing a taxpayer’s 2010 individual income tax return just prior to the government shutdown. The due date of the 2010 tax return was April 15, 2011. This means that the IRS will likely only have until April 15, 2014 to make an additional assessment against this taxpayer. If the government shutdown were to drag on for a number of weeks or even months, it is not difficult to imagine a scenario in which the IRS would be barred from making an additional assessment against the taxpayer in our example.
Any taxpayer currently being audited by the IRS should carefully consider the statute of limitations regarding additional assessments. In certain cases, the statute of limitations may be used as a valuable bargaining tool to successfully resolving an audit.
The government shutdown may also be good news for taxpayers currently involved with litigation with the IRS. The United States Tax Court has suspending adjudicating cases during the government shutdown. Eventually, once the government shutdown ends, the Tax Court will once again begin hearing cases. However, while the government is shutdown, new cases will likely continue to be lodged with the Tax Court. Depending on the length of the shutdown, IRS counsel and the IRS Appeals division may find themselves buried in an unprecedented level of inventory. The volume of cases on the Tax Court docket may result in counsel and the appeals division offering “once in a lifetime” offers to settle cases. Offering such deals may be necessary to reduce a potentially crowded Tax Court trial calendar.
In short, any taxpayer in an audit or controversy with the IRS should carefully consider the effects of the government shutdown in their case and how the shutdown can be utilized to resolve their case favorably.