If an individual tax return has an understated gross income of 40%, what is the statute of limitations for IRS assessment and collection?

When gross income is understated by 40% or more on an individual tax return, the statute of limitations for the IRS to assess additional tax extends beyond the standard timeframe. Typically, under Internal Revenue Code Section 6501, the IRS has three years from the due date of the return or the date it was filed to assess additional tax. However, if there is substantial understatement of income, such as a 25% or greater underreporting, this time frame can be extended to six years.

In this scenario, since the understatement of gross income is 40%, this indeed qualifies as a significant understatement. Thus, the six-year period for assessment is applicable.

The IRS can also pursue collections for up to ten years if there is an unpaid tax liability. However, that timeframe pertains specifically to the collection of the tax owed, not the time frame for assessment adjustments. Therefore, the correct answer reflects the appropriate extended statute of limitations for assessing tax due to significant income understatement.