OK, OK I know I owe the IRS money for my taxes - can they come after me forever? The short answer is no - the IRS generally has ten years to attempt to collect the debt.
Many laws contain a “statute of limitations” (SOL) - a period of time set out for action. For example in Massachusetts the law relating to contracts typically requires a claim to be brought within six years of when a contract was broken. The concept is that laws should be designed to facilitate resolution within a “reasonable” amount of time.
Under the tax law there is a ten year period to collect a tax - the SOL. After this period the debt is no longer enforceable. While this concept appears straightforward a number of issues can arise - for example: when does the period begin, are there any events that can extend the time for collection, if a taxpayer has significant assets as the period begins to expire are there steps that can be taken by the IRS to allow for collection to continue?
Let’s start with a basic question - when does the SOL begin ticking? The relevant date is the date that the tax is “assessed”. This is the date that the IRS records the tax liability. This date is usually at or near the time the tax return is filed - it is not the date the return is filed or the date it is received by the IRS. A tax debt results if the tax liability exceeds payments - i.e. tax withholding from wages, payment of estimated taxes. Once assessed the IRS has a ten year period to collect the debt.
There are situations where the SOL is paused (referred to as “tolling”) - i.e. giving the IRS more than ten years to collect. In general the SOL is paused when the IRS is legally prohibited from collection activities.
Here are some examples of events that cause tolling:
- Filing for bankruptcy
- Filing for a Collection Due Process hearing request (CDP)
- Filing an Offer In Compromise (OIC)
- Pending Installment Agreement (IA)
In the evaluation of any collection case the threshold question is “can the IRS enforce the debt” - if the SOL has expired then no enforcement action can take place. The date the IRS can no longer enforce collection of the debt is referred to as the Collection Statute Expiration Date (CSED).
Where else does the SOL matter? In evaluating the potential for an OIC the threshold issue is whether or not the debt can be paid within the SOL - if it can an OIC is not available.
The SOL can also affect an IA. One requirement for IA qualification is that the debt can be fully paid before the CSED.
Is the ten year period absolute? Well…. It is but the IRS has a tool available to effectively extend the period in limited situations. In the case of property held by a debtor-taxpayer the IRS can refer the case to the Department of Justice - for them to sue and bring the lien to a judgement so that it can seize and sell the property (typically real estate).
How can the CSED be determined? The initial step in evaluating the SOL involves obtaining what is referred to as an “account transcript”. This is the official record of events that impact a taxpayers account with the IRS - reported on a yearly basis.
Included in a transcript will be the date of assessment (which begins running of the SOL) as well as information relating to the tolling events noted above.
Are these records always accurate? For the most part - yes - but issues can arise. The most frequent issue I see is with respect to a pending IA. The IRS should stop the tolling when the IA is either accepted or rejected. However there are situations where an IA resolution (acceptance or rejection) is not noted in the record - in which case the CSED determined by the IRS may be incorrect. We utilize software to determine the CSED but the process can be done manually by reviewing transcript data.
In summary a key consideration in any tax debt collection matter is where the debt falls within the SOL - what is the CSED for the liability? An informed decision of collection alternatives can’t be made without this information.
In our next blog post we’ll discuss the priority of tax liens.
Link to Outline Slides: SOL Outline
Link to Video: SOL Video
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