The first time a client told me about the “3 year rule” I thought it was just one person’s misinterpretation of the law. The conversation went something like this:
Me: “So your Statement of Reasons (SOR) says you late-filed your income tax returns for multiple years. Was there a reason for that?”
Client: “I actually didn’t file late. I had three years to file because I was due a tax refund.”
Me: “It doesn’t work that way. Where did you get the idea you had three years to file if you were due a refund?”
Client: “The IRS website!”
As it turns out, the IRS website does, indeed, seemingly imply as though a taxpayer owed a refund has three years to file his or her return:
“If you are due a refund for withholding or estimated taxes, you must file your return to claim it within 3 years of the return due date.”
But if you’ve been operating under the assumption that you have three years to file your return if due a refund, I’ve got some bad news: you don’t. What the law actually says – and what the IRS fails to adequately explain – is that all taxpayers who make more than a nominal amount of income (as determined by law) are required to file a return by April 15th of the following year. If you don’t file and you’re owed a refund, you won’t be assessed penalties, but you will lose that refund after three years. So, while there is no financial penalty for non-filing if you are due a refund, you also aren’t complying with your obligation under the law and stand to lose money to which you are entitled.
When Misunderstanding is 9/10 of the Law
Confused? I’ll put it into plain English: if you don’t file your tax return by April 15th of the following year – even if you don’t owe a dime or are due a refund – you will encounter security clearance problems.
Our law firm has since litigated at least a half-dozen cases where this misunderstanding is at issue. The DOHA website is replete with even more. Fortunately, these cases can often be won in part by arguing that the misunderstanding was reasonable and not evidence of a willful failure to pay taxes.* After all, if the IRS owes you money, why does the government care when you decide to collect it?
If only tax law were that simple.
*Per legal ethics requirements, please be advised that past results are not a predictor, guarantee, or warranty of future success. Nothing herein is to be construed as legal advice. Consult an attorney regarding your specific situation.
