A Pinch of Salt-November 2010- Waive or Walk: Considerations for Extending the Statute of Limitations


Intuitively, most taxpayers likely assume that giving a tax authority more time to examine their tax return is a bad idea. After all, an extension of the statute of limitations provides state auditors with more time to audit and likely refine an assessment. However, there are times when agreeing (or requesting) an extension of the statute of limitations is justifiable or necessary. This installment of A Pinch of SALT explores the issues that arise when a taxpayer is considering whether to agree to, or request, an extension of the limitation on assessments during a state audit. We further suggest some ideas that can make the decision easier, such as having a corporate policy on signing waivers.

Waivers at the Federal Level

The federal rules for extending the statute of limitations forms the basis for many states’ rules, so a brief discussion of the federal rules is helpful to provide a basis for reviewing some state variances. A taxpayer and the IRS, before the expiration of the statute of limitations prescribed for the assessment of any tax (excluding estate tax), can agree in writing to an extension of the assessment limitalimitation. 1 Although a taxpayer can agree to an unconditional consent, allowing the IRS to examine any issues on the return,2 the IRS is required to notify the taxpayer of the taxpayer’s right to refuse to extend the period of limitations, or to limit the extension to a certain period of time or to particular issues.3 At the federal level, an agreement to extend the period for assessment also extends the period during which the taxpayer may claim a refund or credit to six months after the agreed time of extension of the assessment period.4 The main purpose of allowing an extension of the assessment period is to avoid interruption of the established process of tax return examination by the imminent expiration of the statutory period of limitations for assessment.5 The IRS likely will take immediate steps to allow it to assess any tax if a taxpayer refuses to sign a consent, which means that a notice of deficiency will likely follow shortly after any such refusal to agree to a waiver.6

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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