In the federal income tax world, there are effectively two functions within the Internal Revenue Service (“IRS”). First, the IRS examines tax years and tax returns to determine whether the taxpayer has reported the correct amount of tax liability. In this so-called “assessment phase,” the IRS may propose additional income tax owed beyond the amount reported on the taxpayer’s tax return.
Second, if the taxpayer and the IRS agree on the amount of taxes owed or the taxpayer can no longer challenge the amount of tax, the IRS may engage in actions to collect the federal income taxes that are due and not paid. In this so-called “collection phase,” the IRS may file notices of federal tax lien or propose levies to try to collect the unpaid tax debts.
Congress also recognizes the distinction between the assessment phase and the collection phase in the Internal Revenue Code (the “Code”). With respect to the assessment phase, Congress permits the IRS, as a very general matter, to make an assessment of additional income tax within three years of when the tax return is filed.[i] Barring some exceptions, the IRS may not make an assessment of tax outside this three-year window. With respect to the collection phase, Congress permits the IRS, again as a very general matter, to take collection actions within ten years after an assessment has been made.[ii]
But every general rule has its exceptions, and the assessment phase is no different. Under the governing provisions of section 6501 of the Code, for example, the IRS may make an assessment of additional tax at any time if the taxpayer files a fraudulent tax return.[iii] Similarly, section 6501 provides that the general three-year period to make an assessment does not run at all if the taxpayer has failed to file an income tax return.