Most people are familiar with the statute of
limitations on assessing taxes. The statute of limitations for the IRS to
assess tax is three years from the due date of the return or the day the return
was filed, whichever was later. If there is a substantial omission (more than
25 percent) of gross income on the return, the statute of limitations is
increased to six years. The IRS also has 10 years to file suit against a taxpayer
to collect taxes after an assessment has been made.
What most people don’t know is that there are no statute
of limitations if the IRS can prove that the taxpayer (1) filed a false or
fraudulent return, (2) willfully attempted to evade tax, or (3) failed to file
a return.
Sumner Redstone, (estimated net worth $6.2 Billion) the
Chairman of the Board for CBS and Viacom learned about the statute of limitations
the hard way.
In 2010, due to Sumner Redstone’s testimony in an
unrelated civil case, the IRS discovered that Sumner Redstone had transferred some
of his own shares of his company, National Amusement Inc. to two trusts for his
children in 1972. The IRS also discovered that Redstone did not file a gift tax
return for that year.
Even though the gift occurred nearly four decades ago,
the IRS in 2011 decided to commence an examination of Sumner Redstone’s 1972
tax year. Because Redstone did not file a gift tax return in 1972, the statute
of limitations did not apply.
After a two year examination, the IRS determined that
the 1972 transfer of shares was valued at approximately $2.5 Million, and as
such, Redstone owed $737,625 plus 41 years of interest. By one estimate, the
bill with compounding interest comes out to more than $15 Million. Even for a
Billionaire like Redstone, this was a very expensive mistake.
Redstone took his case to the US Tax Court. But the
court, earlier this month, ruled in favor of the IRS. Even if you don’t meet the minimum income
threshold to file a 1040 (http://www.efile.com/tax/do-i-need-to-file-a-tax-return/#file),
it is best to file a 1040 anyway to start the clock running on the statute of
limitations.
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