If you have back taxes that have accumulated for several years, it may seem like you are facing a never ending uphill battle. The good news is there is a limit on how long the IRS can legally collect tax debt from a taxpayer. In fact, there is a 10 year statute of limitations. In this blog, we will discuss the length of time the IRS has to collect the tax debt, how this time can be extended (tolled), and how different resolution options can be affected by the amount of time the IRS has left to collect.
How Long Does the IRS Have To Collect?
The IRS has what is called a Collection Statute of Limitations. These limitations in turn create what is called the Collection Statute Expiration Date (CSED). This is the date when the tax debt expires and the IRS can no longer collect. According to Internal Revenue Code “IRC” § 6502(a), the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun, within 10 years after the assessment of the tax. What this means is that the IRS has 10 years to collect tax debt from a taxpayer starting from the date the debt was assessed.
CSEDs Start With Tax Assessments Not Tax Years
There are a few things to be aware of regarding CSEDs.
1) The IRS 10 year statute of limitations starts when the tax debt is assessed and is not necessarily related to the tax year. A taxpayer can owe taxes for tax year 2016 but the filing deadline for a 2016 return would be April 15th, 2017. The CSED is calculated using the April 15th, 2017 date because the tax debt is assessed once the return is filed, making the CSED date April 15th, 2027. The same concept is true for tax years that are audited. If the IRS audits a taxpayers during tax year 2016 for tax years 2013, 2014, and 2015 and assesses a balance due, the CSED would be calculated using the assessment date in 2016, not the tax year that were audited.
The Internal Revenue Manual (“IRM”) 126.96.36.199.15 states that if a tax assessment had been made and a CSED has been established and it is found later that an additional amount is owed for the same tax year, the additional amount of tax assessed will be assigned it’s own CSED based on the assessment date of the additional tax. This means that if you filed a return and owed the original amount due would be assigned a CSED. If a second amount is found to be due for the same tax year, the additional amount due would be given its own CSED separate from the original.
2) Depending on the date the tax liability was assessed, each tax year will usually have its own CSED. This is common when a taxpayer owes for consecutive years. For instance, a taxpayer files 2017’s tax return on April 15th, 2018 with a balance due and the following year files 2018’s tax return on April 15th, 2019 with a balance due. Each tax liability would have its own CSED because each has its own assessment date.
3) Treasury Regulation (Treas. Reg.) § 301.6501(c)-1(c) states, in the case of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time after the date prescribed for filing the return. In other words, if no tax return is filed, there can be no CSED until an assessment is made. Typically, the IRS will file a Substitute Filed Return (SFR), which will create an assessment and usually results in an amount being due. A taxpayer who knows they will owe and decides they won’t file is really causing themselves bigger problems. The IRS, at any time, can file an SFR for tax years with missing returns based on information the IRS has obtained.
Tolling events extend the IRS 10 year statute of limitations and give the IRS more time to collect the tax debt. Common tolling events are filing for bankruptcy, submitting an offer in compromise, a pending installment agreement, or filing for a collection due process hearing (CDP hearing).
The tolling event extends the CSED based on the amount of time it takes for the tolling event to be completed. For example, if a taxpayer files for bankruptcy (that doesn’t include the tax debt in question), the CSED will be extended by the amount of time it takes to complete the bankruptcy. The IRS will also add an additional six months for tolling events involving bankruptcy.
The best way to describe the statute of limitations is a stopwatch. The stopwatch originally gets set to 10 years and then counts down. During the count down, if a taxpayer files for bankruptcy, submits an offer in compromise, requests a Collection Due Process hearing, or triggers any one of the numerous tolling events, the stopwatch will stop counting down until the event has been completed. Once the tolling event is completed, the stopwatch will begin to counting down once more.
Taxpayer A owes taxes for tax year 2018 that was assessed on April 15th, 2019. The CSED date for this debt is April 15th, 2029. In 2020, Taxpayer A requests an installment agreement, which takes 1 month to complete. Because the installment agreement took 1 month to complete, the CSED date for the tax debt is now May 15th, 2029.
How CSEDs Impact Strategies for Dealing with Tax Debts
Depending upon the remaining time the IRS has to collect a tax debt, different resolution options may be available to taxpayers. The statute of limitations has such a big impact because it determines whether the IRS will be able to collect the entire tax liability. If the IRS has the full 10 years to collect the tax debt, the IRS may be less willing to accept an Offer In Compromise or a payment plan because they have a long period of time to collect.
When the statute of limitations is closer to expiring, a taxpayer may have more options. A taxpayer may qualify for settling their tax debt through an offer in compromise if their financial situation shows they cannot make an adequate monthly payment to pay the debt in full before it expires. It should be mentioned that the taxing authority also knows the time is growing close for them not being able to collect and so collection action could become more aggressive.
Knowing the ins and outs of the IRS 10 year statute of limitations is an extremely useful bit of information, especially when determining the best option for resolving a tax issue. There are plenty of cases where the taxpayer is unaware that the CSED has been extended due to a tolling event. Consulting with a tax attorney before filing for bankruptcy or submitting an Offer in Compromise is always recommended because these types of resolutions will not always get rid of tax debt and could lead a taxpayer to ending right back at square one.