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by: Anthony Parent 2015-02-10
The IRS statute of limitations on collections -- also known as the collections state expiration date (CSED for short) -- determines the window of time in which the IRS can collect. Simply put, the expiration date for the IRS's ability to collect is ten years from the initial tax assessment. Make a note of the words initial tax assessment. I really want to stress that the CSED only begins once a tax has been assessed.
If you're hiding from the IRS, the CSED has yet to start. Ten years from now, assuming you're still avoiding the IRS, you'll be in the exact same place you are now. Unless you come forward and have your taxes assessed, the IRS has until the end of the world to collect (and even then, I wouldn't put it past them to keep trying). But once that clock starts ticking, that glorious tax-fighting clock, it can be used in a number of different ways. From significantly reducing debt to working as a superb bargaining chip, the importance of the CSED shouldn't be understated.
One of the first things I tell any of my clients is that the IRS is wildly complicated. The manual for IRS employees, the Internal Revenue Manual (IRM), is over a thousand pages of absurdly dense material. So, when it comes to dealing with the IRS, never expect things to be straight-forward. Unfortunately, the CSED falls under this rule. It's not as easy as counting to ten years and calling it a day. Why not? There are things that force you to stop counting. These specific actions "toll" -- the official term for suspend -- the ten-year CSED from running uninterrupted. Isn't it just like the IRS to throw a wrench into the equation!
While being a fairly extensive list, please be aware that this is not an exhaustive list of when the IRS statute of limitations is tolled.
Filing an Offer in Compromise: Offer in compromises are tough; unless it's a reasonable offer, you can bet your bottom dollar that the IRS is not going to take you seriously. That being said, they will always encourage you to file an offer...but, just because you're filing based on their recommendation, don't mistake their encouragement for certainty. Even if an offer in compromise is entirely reasonable, the IRS has zero obligation to accept the offer you put forward. Sometimes they play sneaky and will have you file offer after offer in order to keep extending the CSED. It's a dirty trick, but no one should ever expect the IRS to play fair.
Leaving the United States: If you leave the United States, the CSED clock stops running. If anyone is thinking about running away and hiding in another country until their debt expires, they better think again. The IRS has some absurdly long arms that reach around the entire globe. As I recently wrote about, the IRS is now sharing information with customs and the Department of Homeland Security --- maybe in the near future we'll see the IRS coding delinquent accounts as a taxpayer abroad? It's going to be an interesting development to watch.
Filing Bankruptcy: If you file any type of personal bankruptcy, the CSED statute of limitations is put on pause for as long as the bankruptcy is open. For Chapter 7 bankruptcies, we see the average tolling period tends to be between 6-9 months. However, for Chapter 13 bankruptcies, sometimes the statute of limitations will be tolled for years. Bankruptcy can be a real option for wiping out tax debts, but be wary that it can also have an effect on your CSED. Talking with tax and bankruptcy professionals is going to be your best bet in deciding what's the most effective strategy for your particular situation.
Filing for a Collection Due Process Hearing: Responding to a Collection Due Process (CDP) hearing within 20 days after being issued a Final Notice of Intent to Levy or a Notice of Federal Tax Lien, or any subsequent tax court petition will toll the CSED. On a positive note, filing for an Equivalency Hearing -- which allows the IRS to continue to collect -- does not put the CSED on pause.
Filing an Installment Agreement Request: While an installment agreement is being considered, the CSED is tolled.
Fraudulent Action: A taxpayer cannot defend a collection suit on the grounds that the statute of limitations has expired if the taxpayer's own fraud prevented collection of the tax before the expiration date.
If Someone Else Legally or Illegally Has Your Stuff: The CSED is suspended during the time that the taxpayer's assets are in the custody or control of a court. Wrongful seizure by the IRS of a third party's property extends the collection period by the amount of time that the IRS held the property.
Extension of CSED: A taxpayer and the IRS may agree to extend the collection period. This is rare and usually only happens when the taxpayer wants to negotiate a smaller installment agreement.
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