Technically these are statute of limitations matters. When these 3 year statutes of limitations pass, the IRS can generally no longer assess additional tax or allow a claim for refund.
To claim a refund or credit you must file your tax return and make that claim within 3 years of the due date; including extensions, OR make your claim for refund 2 years after the tax was actually paid (think – sending payments years after the due date because of complications).
The 3 year rule is easy enough to understand: April 15, 2017 would have been the last day you could claim a refund for your 2013 tax return (originally due April 15, 2014) – 3 years. If you had extended the due date for your 2013 return to October 15, you have until October 15 of 2017 to claim that refund. Every year, in the beginning of October, the IRS will try to alert taxpayers for whom the 3 year statute is about to expire because up to a million people a year lose out on their tax refunds because they didn’t bother to file.
You have 3 years from the due date to claim your refund, or 2 years from the date the tax was actually paid, whichever comes later. Generally the 2 year rules come into play for tax returns that were not filed, filed late, or amended. If you don’t file your tax return by April 15, the IRS will consider any tax paid for that year to have been paid on April 15 – whether you file or not.
If you file a return beyond the 3 year lookback period, then your claim to any refund or credit will be limited to amounts of tax that were paid in the last 2 years. Again, we’re dealing with tax returns that were either filed late, or amended; it happens.
The lookback rules also affect audits. Generally the IRS has 3 years from the date the return was filed, including extensions, to examine it. That’s from the time the return was filed. If you don’t file, then the statute of limitations never starts.
We do meet folks who do not file for many years because of IRS phobias, and they lost refunds for years beyond the 3 year lookback period. The last project we had like that; the client lost approximately $7,000 in potential refunds. I have two friends who refuse to file because they don’t want the IRS to know their addresses; addresses that the IRS already has – they lose refunds every year. How do I know they are losing refunds? Because if the IRS though they owed tax, then my friends would receive an IRS Notice asking about that tax year. No notice generally means refund. Those people are also leaving the door open for the IRS to audit the older years because the statute of limitations on examining the tax return was never started – because the tax return was never filed.
The lookback rules involve a number of statutes and can become complex beyond the scope of this article. If you file and pay your taxes on time you should not have any problems. If you do have a related problem make sure you seek competent help from a licensed practitioner such as a CPA, Enrolled Agent or Tax Attorney.