How the Internal Revenue Service Works Part 2

Statute of Limitations-
When a taxpayer voluntarily files a tax return, the Internal Revenue Service “assesses” the tax. From the date of assessment, the IRS has ten years to collect any tax due. Two years from filing, the taxpayer could escape personal income tax through Chapter 7 Bankruptcy (there are other conditions also, but this is key) Three years from filing and the return cannot be audited unless fraud is involved.

In the above case, where the Internal Revenue Service files a “substitute for return,” the IRS has ten years to collect from that date of assessment, but you cannot use that substitute in any bankruptcy filing.

Once a substitute for return has been assessed by the Internal Revenue Service, the IRS might not accept your return, especially if some time has passed. This can be a critical issue because it will deprive you of legitimate change in filing status and deductions.

Claim for refund-
Generally you have only three years to make claim for a refund for any tax period. If you owe for other years and do not file a return, the amount of the refund cannot be applied against the other amounts you owe.

Need for change—
It seems reasonable that if the IRS wants ten years to collect, they should apply refunds to old balances for the same ten years. This “loss of refund” is a hidden penalty for non-filers.