Merriam-Webster defines statute of limitations as, “a statute assigning a certain time after which rights cannot be enforced by legal action or offenses cannot be punished.” Examples include filing a lawsuit after a traffic accident or for medical malpractice. The premise is that after a given amount of time, evidence, recall of the incident, credibility of witnesses, etc., will be diminished.
Did you know that there is a statute of limitations for IRS collections? It does! But before you decide to just run out the clock on your tax debt, you need to read about the different classifications of statutes of limitation, their duration and how circumstances like bankruptcy can change the game. Can you reset the clock?
Trying to understand the IRS statutes of limitations can be tricky. That is why I would advise you to check in with me so I can thoroughly explain to you how the statute of limitations affects your tax situation.
How Long Does the IRS Have to Collect on a Balance Due?
The IRS cannot chase you forever and, due to the 1998 IRS Reform and Restructuring Act, taxpayers have a little relief from the IRS collections division’s pursuit of an IRS balance due. Generally, under IRC § 6502, the IRS will have 10 years to collect a liability from the date of assessment.
After this 10-year period or statute of limitations has expired, the IRS can no longer try and collect on an IRS balance due. However, there are several things to note about this 10-year rule.
First and foremost, the statute is carefully crafted to read: 10 years from the date of assessment. The assessment date is April 15 of the year that the taxes were due or the date the return was actually filed, whichever occurs later.
This means several things. First, there is no way to reduce the IRS’s statute of limitations by filing your return before April 15. Second, there is a pretty severe penalty for late filing in that the 10-year period does not kick in until you actually file your return.
Failing to file a return or attempting to hide from the IRS does not relieve you from liability. Next, the assessment date can change if you file an amended return or if the IRS has filed a substitute return on your behalf and you file a return to correct it. In addition, if you tried to conceal income or have filed a fraudulent income tax return, the statute of limitations does not apply on trying to collect on an IRS balance due.
You should be aware that this 19-year statute for collection on an IRS balance due can be extended in certain instances. For example, bankruptcy, requesting a Collection Due Process hearing, applying for an Offer in Compromise, extended periods of time out of the United States, requesting a Taxpayer Assistance Order from the Taxpayer Advocate, or litigation proceedings with the IRS can prolong the statute of limitations.
Also, if the collections statute is close to expiring, the IRS can also sue you in federal court to obtain a judgment against you, which has its own expiration limits. Generally, this is considered a pretty extreme action and the IRS usually does not waste the time or the resources to sue taxpayers in federal court unless the liability is several million dollars.
The Collection Statute Expiration Date
The Collection Statute Expiration Date (CSED) falls under Section 19 of the Internal Revenue Manual (IRM). The CSED refers to the idea that every tax assessment has a statute of limitations. The rules and procedures for the CSED are governed by statute, namely section 6502(a) of the Restructuring and Reform Act of 1998 (RRA 98).
According to the IRM, each tax assessment has a collection statute expiration date, or CSED (IRS.gov, “Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration,” 8/17/2013). “Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government’s right to pursue collection of a liability” (“Collection Statute Expiration”).
However, due to a number of events, the statute of limitations may be extended. Events are specific to the taxpayer’s response.
Tolling the CSED
If the taxpayer responds by filing an offer-in-compromise, bankruptcy, application for a Taxpayer Assistance Order (TAO), a voluntary waiver of the statute of limitations, and a collection due process appeal, then all of these actions and related ones will extend the collection statute of limitations for different extension and/or tolling periods (“Section 19. Collection Statute Expiration”). By signing a waiver of statute of limitations, the CSED can then be extended by no more than five years. The IRS can only request that you sign the waiver if it is in conjunction with a filed installment agreement.
If you file for bankruptcy, because of the automatic stay imposed by the proceedings, the CSED is generally suspended. “Even if the suspension of the CSED under IRC 6503(h) no longer applies, the CSED still may be suspended when substantially all the debtor’s assets remain in the custody or control of the bankruptcy court under IRC 6503(b)” (“Section 19. Collection Statute Expiration”).
The CSED is extended throughout the duration of the bankruptcy proceedings plus six months. It is extended on non-dischargeable tax liabilities, from the date of filing for bankruptcy to the date the bankruptcy is either discharged or dismissed. The extension does not include tax debt discharged in the bankruptcy.
Offer in Compromise
For taxpayers who file an Offer in Compromise (OIC), the CSED will be extended for its duration plus an additional 30 days. Under certain provisions, the IRS is limited from levying and the CSED will be suspended while an Offer in Compromise is pending; will be suspended for 30 days after the rejection of an OIC; and will be suspended during the period of an appeal of a rejection.
Out of Country Status
If a taxpayer is currently residing outside of the U.S. for a continuous period of at least six months, under IRC 6503(c), the statutory period of limitations on collecting the tax owed, after assessment, will be suspended. “To make certain that the Government has an opportunity to collect the tax after the taxpayer’s return, the period does not expire (where the taxpayer has been out of the country for six months or more) until six months after the taxpayer’s return to the country” (“Section 10. Collection Statute Expiration”). In this case, the CSED can be suspended for a very long time.
 Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration.
 The subject of Offer in Compromise is further discussed in Part 3 of Chapter 7: What If I Can’t Pay in Full?
In some circumstances an IRS statute of limitations will work to your advantage. That is why I encourage you to reach out to me if you want to learn how it could apply to your situation. I can also advise you on the different types of IRS repayment options to determine which one would be best for you. Then, we can see how any statutes of limitations would extend your repayment time. It is definitely worth looking into.