Statutes of Limitations on Assessments
This is the first in a series of four articles on Statutes of Limitations (SOL) that relate to California tax law. This month's article addresses common SOLs for assessments unrelated to federal action. Future articles will cover SOLs for refund or credit unrelated to federal action, SOLs for assessment and refund/credit following federal action, and miscellaneous SOLs for assessment and refund/credit.
1. What is the general SOL for us to issue an assessment? Revenue and Taxation Code (R&TC) section 19057 authorizes us to issue a notice of a proposed assessment within four years from the original due date of the return if the return is filed on or before the original due date. The postmarked date of the return is the date it is considered "filed." The four-year SOL for assessments starts to run from the date the return is filed if it is filed after the original due date. This is true whether the return is filed during the "automatic extension" period or after it ends.
2. What is the SOL for assessments related to "abusive tax avoidance transactions?" R&TC section 19755 allows us to issue a notice of a proposed assessment relating to an "abusive tax avoidance transaction" (ATAT) within eight years after a return is filed. This eight-year SOL applies to returns filed on or after January 1, 2000. An ATAT is an arrangement whose principal purpose is tax avoidance. Listed transactions, as identified by the Internal Revenue Service in various Notices, are ATATs, as are all non-listed transactions with substantially similar attributes.
3. What is the SOL for assessments related to omitted income? R&TC section 19058 authorizes us to issue a notice of a proposed assessment six years from the date the return is filed, if the taxpayer omitted an income item greater than 25 percent of the gross income stated on the return, including all schedules and statements attached to the return. For example, the taxpayer's return states $30,000 gross income. We discover that the taxpayer omitted gambling income of $10,000. Since $10,000 is more than 25 percent of $30,000, we have six years from the date the return is filed to issue a notice proposing an assessment of tax, interest, and penalties based on this additional income. Note that if the return contains sufficient information so that we can tell the nature and amount of the income that is not included on the return, then we cannot use this SOL to issue a notice proposing an assessment.
4. Do we ever have an unlimited SOL to issue an assessment? Yes! If a taxpayer does not file a return, we have no time limit to issue a notice of a proposed assessment.