Detailed Answer
(b) The requirement is to determine which statements
are correct in regard to the reopening of a tax year after the statute
of limitations have expired. The statute of limitations stipulate
a time limit for the government’s assessment of tax or a taxpayer’s
claim for refund. The normal period for the statute of
limitations is the later of three years after a return is filed, or three
years after the due date of the return. A six-year statute of limitations
will apply if the gross income omitted from the return exceeds
25% of the gross income reported on the return. If a taxpayer’s
return was false or fraudulent with the intent to evade tax,
or the taxpayer engaged in a willful attempt to evade tax, there is
no statute of limitations. If a tax return has a 50% nonfraudulent
omission from gross income, there would be a six-year statute of
limitations. However, once the six-year period expired, the year
could not be reopened. In contrast, a closed year can be reopened
if a corporation prevails in a determination allowing a deduction
in an open year that the taxpayer erroneously had taken
in a closed tax year. This special rule for the reopening of a tax
year is intended to prevent the double inclusion of an item of
income, or the double allowance of a deduction or credit that
would otherwise occur.