What is the IRS tax debt statute of limitations?
The IRS tax debt statute of limitation is ten years. Yes, it is true. So does that mean all that someone needs to do is wait ten years, and voila, the IRS tax debt goes away? Read this article to find out the difficulties of waiting the IRS out, and why it is critical to know when the IRS can no longer collect on a tax debt.
The clock doesn’t start running until there is an assessment.
In order to get the collection statute of limitations clock to begin to run, there first must be an assessment and an assessment date. So if you don’t file a return, or ever get a bill from the IRS, the 10-year period has not even started yet. There must be a tax bill against you. (NOTE: If you never file a return, the IRS has forever to assess as tax against you)
The date the tax debt is wiped out by the statute of limitations is known as the “Collection Statute Expiration Date,” or CSED. If you asked them, the IRS can sometimes be coy about when the CSED expires. The account transcript and the IMFOLT transcripts will contain most of the information, but typically it takes a tax resolution professional well versed in interpreting IRS’ transcripts to figure out when the CSEDs will expire. Very few IRS employees can tell you over the phone when the date is. Many are not even aware of what a CSED is.
Here’s an example of how the CSEDs work. Let’s say that in 2004, you filed your tax return normally, but you owed $45,000. On April 15, 2005, you filed your return and the IRS assessed you on that date. That means the CSED clock started on April 15 , 2005, meaning, that it will be at least until April 16, 2015 that this debt will be wiped out.
There are various actions that will stop the 10-year clock from running. Whenever the clock is not running, tax professionals and the IRS refer to this as “tolling” the clock. Below are examples of actions a taxpayer takes that tolls a statute of limitations.
What tolls the CSED? The three big ones
Leaving the United States: If you leave the United States, the CSED clock stops running; So don’t think about hiding off in a foreign country expecting your IRS to have gone away by the time you get back.
Filing Bankruptcy: If you file any type of personal bankruptcy, the CSED statute of limitations is tolled for as long as the bankruptcy is open. For Chapter 7 bankruptcies, we see the period tends to be around 6-9 months. However, for Chapter 13 bankruptcies, sometimes this will toll the statute of limitations for years.
Filing an Offer in Compromise: The IRS will always encourage you to file an offer in compromise — don’t make the mistake of thinking their encouragement means you Offer in Compromise has a chance. There are three reasons the IRS wants you to file an Offer in Compromise.
- First, they get to take a look at all your finances and find out what to levy if they don’t accept you offer when you submit a 433a or 433b Collection information statement.
- Second, because they get to keep your down payment (warning: there are ways to limit your down payment, the IRS won’t tell you about it).
- And lastly, while your Offer in Compromise is pending, the CSED clock is tolled. We have seen cases were taxpayers have repeatedly filed Offer in Compromise after Offer in Compromise, only to be rejected and learn the IRS still has a whole lot of time to collect. Bummer. This is why we will only file an offer in compromise for a client if we thinks there’s a chance (and another warning: Using an Offer in Compromise calculator is a lousy way to figure out if you are an Offer in Compromise candidate or what your Offer in Compromise should be)
So sometimes if you are near the end of a CSED, it is better to attempt to negotiate an Installment Agreement (pay something each month) or get into Currently Non-Collectible status (pay nothing each month), as either one of those solution keeps the CSED clock ticking. This strategy is one of the reasons I laugh when I see advertisements claiming you can settle your tax debt for “pennies on the dollar.” Oh yeah? Because sometimes, you can settle for nothing on the dollar!
Before the CSED expires
Here’s one other warning. Right before the CSED expires, that’s when the IRS get the most aggressive. Because in most cases, once that CSED comes and goes, the IRS can’t do anything about your IRS tax debt. We had one experience, hyper-aggressive Revenue Officer acted illegally, here conduct actually made into the business bestseller I co-authored (Download “Protect & Defend” free right here).
After the CSED expires
If you do successfully wait out the IRS, watch out for two possible surprises:
- If a federal tax lien was filed against you, the tax lien will have become stale-dated (the “last day to refile” date is the date a tax lien will become of no effect. However, just because your tax debt has been wiped out, don’t expect the IRS to help you with your tax lien by releasing it or withdrawing it.
- The IRS can convert your IRS tax debt into a civil judgment by suing you in US District Court. If this happens the standard rules of civil judgments apply. Which is typically, indefinite. The good news is that civil judgment conversion arerare, and usually happens when I client is intentionally hostile or uncooperative with the IRS.
Conclusion about IRS Tax Debt Statute of Limitations
Being aware of precisely how long the IRS has to collect on a tax debt is absolutely essential when structuring the best for to settle back tax debt. If a taxpayer or a taxpayers’ attorney or representative does not know this information, the best result to negotiate IRS tax debt becomes increasing unlikely.