The IRS Collection Statute Expiration Date (CSED) is the amount of time that the IRS has to collect upon an assessed tax. After this period ends, the IRS has no legal recourse against a taxpayer regarding unpaid taxes. The IRS has to write it off as a loss and move on. The Collection Statute Expiration Date (CSED) is 10 years from assessment.
As an example, a taxpayer mails their Form 1040 individual income tax return on April 1, 2021, the IRS receives it on April 10, 2021 and then assesses the tax on April 20, 2021. The Collection Statute Expiration Date (CSED) would be April 20, 2031. Most people pay their tax liability and the issue is settled. Others that do not pay their tax liability need to be aware that the Collection Statute Expiration Date (CSED) is running in the background. It will affect their collection alternative options.
Offer in Compromise (OIC) candidates need to know the Collection Statute Expiration Date (CSED) because if their monthly disposable income can payoff their tax liability before the CSED, they do not qualify for an OIC.
If a taxpayer is considering an Installment Agreement (IA) the Collection Statute Expiration Date (CSED) may determine the length of the payment terms and also the amount of the monthly payment.
For taxpayers in Currently Not Collectible (CNC) hardship status that are temporarily relieved of their tax obligation, knowing the CSED is critical because they can end up having the tax liability expire while they are in CNC.
If a taxpayer is not in a collection alternative and has a tax liability with the Collection Statute Expiration Date (CSED) close to expiration, it could be advantageous to just let the clock run out and not make a payment. However, calculating the correct CSED can be a complicated exercise due to tolling events that extend the CSED. Common tolling events to be aware of include:
1. Taxpayer Assistance Order. This is when help is sought from the Taxpayer Advocate Service.
2. Collection Due Process (CDP) Hearing. CDP is an Appeals conference.
3. US District Court Litigation.
5. Summons Enforcement.
8. Innocent Spouse.
On the other hand, for unfiled past due tax returns, the tax has never been assessed. Therefore, the Collection Statute Expiration Date (CSED) has not even started. This is one reason why it is always important to file even if you cannot afford to pay the tax because you start the Collection Statute Expiration Date (CSED) running. The other reason to file when unable to pay is because the Failure to File (FTF) penalty is 5% per month up to 25%. In five months a 25% penalty is racked up.
The last thing to be aware of is that the IRS may take collection enforcement action against a taxpayer in the form of a Tax Levy (wages, social security income, independent contractor income, bank accounts, IRA, 401k) or Tax Lien when the Collection Statute Expiration Date (CSED) has already expired. Most taxpayers are not even aware of the fact that they do not owe taxes in this situation. Everyone has the right to dispute the collection and get it cancelled.
Keep the Collection Statute Expiration Date (CSED) top of mind when determining the appropriate strategy to deal with an unpaid tax liability. It may just save you a significant amount of taxes.
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