IRS STATUTE OF LIMITATIONS: HOW LONG CAN IRS COLLECT TAX DEBT?
One of the first things people often wonder when they incur a tax liability is how long the IRS has to collect it. Whether the IRS is going to haunt them for the rest of their lives is a very common concern. The good news is that the IRS can’t pursue collections from a taxpayer forever. Usually, the tax liability will get “charged off” after about ten years.
However, beware, the IRS may have much more time to collect than ten years depending on the circumstances. The following frequently asked questions (and answers) will tell you what you need to know if you’re curious about just how long the IRS can pursue you, and will also provide helpful tips about what to do depending upon how old your tax liability is.
HOW LONG CAN THE IRS COLLECT ON MY DEBT?
The Internal Revenue Code (tax laws) allows the IRS to collect on a delinquent debt for ten years from the date a return is due or the date it is actually filed, whichever is later. This is called the IRS Statute of Limitations (SOL) on collections. When the IRS refers to its time left to collect, they usually say “CSED,” which stands for Collection Statute Expiration Date.
For example, your 2019 return is due on APRIL 15th 2020. If you file early, let’s say January 31, 2020, the IRS has until April 15, 2030 to collect.
If you file your return 2019 return late, say Jan 1, 2022, then the IRS has until JAN 1, 2032 to collect.
WHAT HAPPENS TO THE TAX, PENALTY AND INTEREST AT THE END OF THE 10-YEAR STATUTE?
If you make it to the end of the ten years (and nothing extends the collection period—see below), the tax, penalty and interest are written off and you no longer owe the debt.
WHAT IF YOU DON’T FILE A RETURN AND THE IRS FILES ONE FOR YOU?
The IRS can prepare a substitute return and the 10-year statute begins when the IRS assesses the balance they figure for you. If you later file your own return, the collection statute starts over. Usually, the IRS will overstate your income and/or understate your deductions leaving you with a higher tax burden than if you had filed your own return. So, you may want to file your own return to make sure they only collect what is actually owed, even though it means resetting the 10-year statute.
WHAT IF THE IRS AUDITS OR DISAGREES WITH THE TAX OWED ON YOUR RETURN AND AN ADDITIONAL TAX IS ASSESSED?
That new tax liability will reset the 10-year statute over again.
WHAT IF YOU AMEND YOUR RETURN TO LOWER YOUR TAX LIABILITY?
The amended return resets the statute.
DOES THE 10 YEAR STATUTE APPLY TO ALL FEDERAL TAXES?
Yes. There is only one 10-year SOL for all the different types of federal taxes, whether it is income tax, employment tax, or excise tax. All taxes fall under the 10-year statute from the due date or assessment date, whichever is later.
I FILED MY RETURN MORE THAN TEN YEARS AGO. WHY DO I STILL OWE?
Probably because the statute was paused for a period of time. The 10-year SOL can be suspended by certain actions you take to stop collections. There are actions that you, the taxpayer, can take which prohibit the IRS from collecting, and so the 10-year statute is suspended until such actions are completed and the IRS can once again collect. The ten years allowed to collect has not changed, it is only suspended. Some examples of suspending the statute of limitations include filing a bankruptcy or petition in tax court. More common examples include filing a Collection Due Process Appeal or an Offer In Compromise (tax settlement proposal). There are several other actions that can suspend the statute. They all have in common the effect of prohibiting the IRS from collecting for a time.
I have seen cases in which the statute is extended for as many as five years because of bankruptcy and settlement attempts. This can prolong the pain of being subject to IRS collection, but the results you can achieve by exercising your appeal and court rights may be worth the additional time in collections.
HOW DOES APPROACHING THE END OF THE TEN YEARS AFFECT THE IRS’S COLLECTION EFFORTS?
As you near the end of the ten years, the IRS can become very aggressive in collecting. They want to get paid, and they know they’re running out of time, so they will be very careful to try and collect from all of your “excess” income and non-exempt assets. So, if you have been able to keep the IRS at bay with a small payment and it will not pay off the debt, as you near the end of the ten years, you may receive a letter requesting a financial review so they can collect more out of you.
WHAT IF MY MONTHLY PAYMENTS WILL NOT PAY OFF THE DEBT IN TEN YEARS?
The IRS wants to get paid in full. However, it cannot get more than you are capable of paying given your income, assets, and a basic standard of living. This means that if you prove to the IRS that your maximum payment is only $100, for example, and even if you owe half a million dollars, they have to accept your payment. That, however, may only be temporary, as the IRS can revisit your ability to pay periodically. A payment agreement that will not pay off the liability within the collection statute is called a “Partial Payment Installment Agreement” (or “PPIA”). The IRS can’t collect more than you can pay, so it is forced to settle for what it can collect within their 10-year collection statute.
DOES THE STATUTE OF LIMITATIONS HAVE ANY AFFECT ON MY ABILITY TO SETTLE?
The closer you get to the end of the ten years, the easier it is to settle your debt. If you are attempting to settle your debt with an Offer In Compromise, it will help you to be near the end of the SOL because the less time IRS has, the less it can potentially collect. This does not mean that you should necessarily wait many years before trying to settle your tax liability. To the contrary, if you are a good settlement candidate now, then it is very often the best course to settle now. A successful settlement will get them off your back now, and may rid yourself of your tax liability long before the 10 years is up.
DOES THE STATUTE OF LIMITATIONS AFFECT HOW I SHOULD GO ABOUT NEGOTIATING?
When we review a client’s case, we examine your account transcripts for each period that you owe so we have an idea of how long the IRS has left to collect. This is helpful in designing a strategy to best resolve the liability.
I hope you don’t have to deal with an IRS debt for the full ten years. But if you can’t pay it off or settle, the good news is that due to the 10-year Statute of Limitations, the IRS cannot hound you forever.
If you would like to learn the best way to resolve your tax liability given your unique circumstances, give us a call. We have caring and knowledgeable representatives on staff who will be happy to evaluate your situation at no charge.
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