What is meant by a "closed year" in tax terms?

A "closed year" in tax terms refers to a year for which the statute of limitations has expired. This means that the Internal Revenue Service (IRS) can no longer initiate an audit or take legal action to collect taxes for that particular tax year. Generally, the statute of limitations is three years from the date a tax return is filed, but it can be extended in some situations, such as when there is substantial underreporting of income. Once this period has passed, the taxpayer is no longer at risk of financial or legal consequences regarding that year’s tax return, providing them with a certain level of security and closure concerning their tax obligations for that year.

The other options refer to different scenarios that do not capture the essence of what a closed year signifies in tax terms. For instance, a year where taxes are still under audit indicates that it is still an open year with potential tax liabilities being reviewed. A year that has not started yet for filing clearly doesn’t apply since closed years pertain to those already completed. Additionally, a year involving only small business filings does not relate to the concept of a closed year, as the status of the year does not depend on the type of filings made.