Most people have heard about a “statute of limitations” in the area of criminal law. There is a period of years, after a crime has been committed, to prosecute the people that the authorities believe committed the crime. Once that time limit has passed, charges can’t be brought.
Did you know that there is a “statute of limitations” on the IRS’ ability to enforce tax collection? There is. It’s the “10 year collection statute”.
Here’s an example of how it works:
- John and Jane Q. Public e-file their 2017 tax returns on 4/1/18.
- The IRS processes their electronic return on 4/5/18 and if there is a balance due, “assesses” the tax due on 4/5/18.
- The IRS has until 4/4/28 to collect that tax by statute
The key date here is when the tax is “assessed”. The statute says 10 years from assessment, not 10 years from filing date or filing due date.
There are several actions that can cause the 10 year statute to “toll” or stop running. They are:
- Filing for bankruptcy
- Requesting a Collection Due Process Hearing
- Filing an Offer in Compromise
- Requesting an Installment Payment Agreement
The statute will start running again once the time period to consider these alternatives has finished. In the case of a bankruptcy, an additional six months is added to the collection period once the bankruptcy is discharged.
Why is all of this important?
Before considering the various tax resolution options available to a client, the tax professional has to know what the CSED (collection statute expiration date) is for each tax year in which the client has a balance due.
By knowing this, the tax professional can employ a strategy to resolve the taxpayer’s debts at the lowest possible cost to the taxpayer.
For example, if there is only a year or two left on the collection statute and the taxpayer just lost their job, got divorced or had a major medical expense that set them back, you could request a Currently Not Collectible status and hope to “run out the clock” on the collection period.
If there are many years left and the same scenario as above, you might make an Offer-in-Compromise to try to settle the debt for less than its face value.
Understanding when the 10 year collection statue expires for each year of a client’s tax debt is critical in formulating a strategy to resolve their tax debts.
For questions on this topic or any other tax topic feel free to call me at 203-434-5626, email me at mailto:mikeo24@bythebooktaxes.net or visit my website at www.bythebooktaxes.net
Michael O’Leary, EA, MBA
By The Book Taxes
One Morgan Avenue
Norwalk, CT 06851
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