When is a tax year "closed"?

Tax practitioners routinely use the terms "open tax year" and "closed tax year"; generally, the difference between the two is well understood. In the case of an open tax year, the period of limitations has not expired within which (1) the IRS can assess additional tax and/or (2) the taxpayer can file a timely claim for credit or refund of an overpayment in tax. In the case of a closed tax year, the period for assessment and/or refund has expired.

However, the real implications of the expiration of the statute of limitations (SOL) for a particular tax year (i.e., the closing of the year) are often misunderstood. All it really means to say that a year is closed is that generally no tax money can change hands between the Service and the taxpayer. The IRS cannot assess and collect any additional tax; the taxpayer cannot obtain a credit or refund. Beyond that, closure of a tax year imposes few restrictions on either party's ability to review or analyze the tax year and/or to recompute the taxpayer's correct tax liability for that year.

For example, if...