Sam Brotman, JD, LLM, MBA July 2, 2020 12 min read

The IRS Collections Statute of Limitations

What If I Cannot Pay an IRS Balance Due?

In the tax world, to quote Benjamin Franklin, “an ounce of prevention is worth a pound of cure.: Almost all taxpayers can engage in some level of tax planning to their benefit prior to a return being filed. As a practitioner, I like to perform a mid-year check with my clients to review their current tax situations and to make sure they are on track with where we have identified they need to be. 

Although particularly helpful with self-employed individuals and those with small businesses, to ensure that they are making proper tax deposits, it can also be helpful for W-2 employees who want to adjust their withholdings during the course of the year. In addition, I would recommend checking in with a tax professional to understand the tax consequences of any major life events. 

Getting married, having a child, changing jobs, getting a raise, buying a house, moving, caring for another individual, and a variety of other changes can all impact your future tax situation. It is always better to be able to be aware that you may have a balance due at the earliest possible juncture in order to try and minimize your liability.

If tax planning cannot mitigate the liability, usually it is best to file the return as soon as you can. The IRS imposes a failure to pay penalty, which is five percent per month of the tax that was owed from the date the return is due up to a 25 percent maximum. As long as the return is filed by the due date or six months after, if a timely extension was filed, the taxpayer can avoid the penalty. 

While you will still be hit with failure to pay penalty, equivalent to 12 percent per year, in addition to interest at the statutory rate, these are unavoidable if the taxpayer cannot pay the balance due

Although filing a return may put the IRS on notice of the liability sooner, filing the return has two principal advantages. First, it starts the clock running on the three-year IRS statute of limitation for audit and the 10-year statute of limitations for collections. 

Second, it prevents the IRS from filing a substitute for return (SFR) and gives the taxpayer the benefit of filing while the events of the past year are still fresh. This allows the taxpayer to be in a better position to remember potential credits and deductions, which the IRS will not give to the taxpayer if an SFR is filed. Ultimately, this usually results in less underlying tax being owed, which can make a big difference in IRS penalty and interest calculations.

 

 

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[1] 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.

Bankruptcy

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)[2], 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.

[1] Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration: http://www.irs.gov/irm/part5/irm_05-001-019.html.

[2] The subject of Offer in Compromise is further discussed in Part 3 of Chapter 7: What If I Can’t Pay in Full?

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

Book an Action Plan
avatar

Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

COMMENTS

BECOME AN INSIDER

Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan