IRS Statute of Limitations on Tax Debt Collection
How long does the IRS have to collect a tax debt? Do unpaid taxes ever expire? If you owe taxes to the IRS, you may have these questions. As a general rule, the IRS has ten years to collect back taxes or tax debt. There are exceptions. Here’s a look at the details.
The IRS Statute of Limitations on Collection
A statute of limitations (SOL) is a federal or state law that limits the period allowed to file legal proceedings. With regards to the collection of Federal tax debt, this refers to the IRS statute of limitations on collection. It is the time period the IRS has to collect on taxes owed for a specific assessment. The Collection Statute Expiration Date (CSED) is simply the date the SOL on collection for a particular tax period expires. The IRS aggressively pursues taxpayers who owe taxes right before their CSEDs arrive. Why? After this date, the IRS cannot legally take you to court over the debt. Therefore, the tax debt essentially disappears.
The Collection Statute Expiration Date (CSED)
As discussed above, if you have not paid off your tax balance by a tax year’s CSED date, the IRS can no longer legally pursue the debt. But when does the ten year period start ticking for the IRS to collect taxes owed?
The ten year period begins when the IRS assesses tax liabilities. Each assessment carriers its own CSED. The assessment happens when you file a tax return or when the IRS files for you. If you fail to file a tax return, the IRS may file a “Substitute for Return” or SFR. This event creates a deficiency assessment.
Technically, if you fail to file a tax return, there is no deadline for an assessment of tax. However, the IRS waits a few years before doing an SFR. Once the SFR is complete, the 10-year time clock begins. Therefore, waiting to file a tax return, is in no way a strategy for shortening the SOL on collections.
Actions that Suspend or Toll the 10-Year Rule On IRS Collections
There are ways to suspend or toll the CSED date(s) for taxes owed.
To toll or suspend the statute of limitations on the collection means the clock stops ticking temporarily. The IRS, as indicated in the IRM (Internal Revenue Manual), adds the total suspension time to the 10-year SOL period. Actions a taxpayer takes can result in temporarily suspending the IRS from legally being able to collect. If two tolling events overlap (examples below), the IRS can only toll the days that overlap once. There are a few ways to toll or suspend the SOL on collections:
Actions the Taxpayer Makes
- Bankruptcy: If a taxpayer decides to file for bankruptcy, the court issues an automatic stay for the tax periods included in the bankruptcy. The SOL is usually suspended from the time the taxpayer is in bankruptcy plus six months. Since a taxpayer cannot always discharge taxes in bankruptcy, it is essential to understand when the collection time clock will resume.
- Installment Agreement: If you request an installment agreement (aka payment plan), the period from the request to the decision by the IRS, tolls the statute respectively. The SOL is also suspended for 30 days after a denial or termination of an Installment Agreement or if the taxpayer appeals on a rejected IA request. Pending Installment Agreement’s where the IRS does not accept or reject the IA, does not toll the CSED(s).
- Innocent Spouse Relief: A request for innocent spouse relief tolls the statute until the expiration of the 90-day period to petition the tax court. If you petition the tax court for an IRS denial, this leads to the suspension of the SOL until the final court decision plus 60 days.
- Offer in compromise: If you submit an Offer in Compromise, the period from when you submit the OIC to when the IRS makes a decision tolls the statute respectively plus 30 days.
- CDP hearing: When you request a Collection Due Process Hearing (CDP), the IRS suspends the SOL while the hearing is pending. This rule applies to CDP requests within 30 days after a final notice of intent to levy.
- Living abroad for six months: If you live outside the U.S. for six months consecutively, this event leads to the suspension of the SOL as well. Furthermore, it does not expire until six months after the taxpayer returns to the US.
- Military deferment: If the IRS ability to collect is impaired by the taxpayer’s military service, the CSED can be suspended during the taxpayer’s military service plus 270 days. If the taxpayer is in a combat zone, the CSED is suspended plus an additional 180 days.
- Taxpayer Assistance Order: If the taxpayer files Form 911, this tolls the statute while the case is pending for review. The taxpayer may file this form when the taxpayer is suffering and about to experience a tax levy or tax lien that will cause extreme economic hardship.
Actions by the IRS
If the IRS takes a rare action and sues the taxpayer for the collection of back taxes or the taxpayer is in litigation with the IRS, the SOL will be suspended. Generally, the IRS files suit for the collection of back taxes.
Voluntarily Extending the CSED Date(s)
The 10-year statute of limitations on collection can be extended if you voluntarily agree to extend it. The extension is normally for five years. In rare cases, the IRS may approve a partial payment installment agreement if the taxpayer agrees to extend the SOL for collection. If the taxpayer will come into certain assets after the CSED date(s), the IRS will generally request an extension to the CSED dates in order to approve a certain type of tax resolution agreement. The CSED ends 90 days after the waiver’s expiration date.
Additional Details About the CSED
CSEDs are a very important data point to determine the best resolution for a taxpayer. It is essential you take into consideration the impact various IRS resolutions or options have on the 10-year time clock. The time clock doesn’t tick for everyone. The IRS does not provide this time-clock to taxpayers who commit tax fraud. Hiring a tax professional to check CSED dates can be in your best interests as IRS CSEDS are inaccurate 40% of the time according to TIGTA.
If you have back taxes and you need help in determining the CSED dates for the tax years you owe, contact a licensed tax professional. Alternatively, you can contact the IRS at 1-800-829-1040. The IRS does provide transcripts requests online, which will include the CSED date(s). If the CSED has already come to pass, you will see Code 608 as an entry on the IRS transcript for the particular year in question.
In most cases, you should not try to “hide” from the IRS until the CSED happens. It’s always better to contact the IRS and work out an arrangement. A tax professional can help you. In fact, a good licensed tax professional will consider a taxpayer’s CSEDs as they define the tax resolution strategy in most cases.