I’ve recently advised clients about whether the governmentcan still collect old tax liabilities. Thisissue can be very technical and often depends on dates and information not inthe taxpayer’s records, so I recommend having legal counsel make determinationsabout how long tax will be collectible as part of a larger strategy. With that said, this article provides basic informationabout how the law works relating to the questions I hear most frequently.
First, here are a couple of quick and easy answers:
- If you owe the Oregon Department of Revenue,there is no statute of limitation.That’s right, Oregon can come after you forever. When you die, they can collect from yourestate. It’s not nice, but it’s simple.
- If tax has not been assessed, either by filing areturn or the IRS filing a substitute for you, no statute of limitation hasstarted running, so the IRS will also have forever. [I say that referring to the laws limiting theauthority of the IRS. As a practicalmatter, the IRS has internal guidelines about how far back they will go. It may not be as bad as you think. You should seek counsel if there are oldyears for which you didn’t file and you need to come into compliance.]
With that out of the way, we can turn to the more complex issues in this area.
The general rule is that the IRS has ten years from thedate of assessment to collect the tax due, but many events can extend that time. We’ll look at these different pieces.
Assessment
Assessment is the official, formal recording of tax by the U.S.Treasury. This is typically doneelectronically now, but in some cases will still be done on paper.
You Filed a Return
The most common assessments are those following voluntarilyfiled tax returns. The IRS is allowed toassess the tax you report on your return without jumping through any hoops andthey’re only allowed to do it within three years of when the return isfiled. The return is usually consideredfiled when received, but there are exceptions.For example, if you file the return early, it is treated as filed on thedue date. If three years for them to dothe paperwork sounds like a long time, don’t worry, they usually assess very quicklybecause until they assess the tax, they can’t take any collection action. So even if they did wait a long time to makethe assessment, they would still have only ten years to collect; that period wouldmerely start from a later date and they wouldn’t bother you until then.
You Filed a Return but the IRS Wanted More
If you file a return and the IRS makes changes, there can beadditional assessments. The proceduresvary depending on the type of changes, but this category includes audits (or “examinations”as the IRS calls them). They will notifyyou of the deficiency they determine and give you an opportunity to disputeit. After your opportunities to disputethe tax have passed or failed, they can assess the tax and begin collection. This assessment will be separate from the initialassessment based on the return you filed.It will have its own date and its own ten year period for the IRS tocollect it.
You Didn’t File a Return, so the IRS Filed for You
Just as the IRS can make an assessment of tax throughdeficiency procedures when you file an erroneous return, they can assess taxthrough deficiency procedures if you don’t file at all. If you don’t file a return the IRS mayprepare a substitute for return. This isusually the worst result. The IRS willnot make any elections for you or claim any credits for you. As I noted above, this can legally happen atany time if you don’t file a return. You would need to check the IRS records todetermine when the assessment was made to know when the ten year clock startsrunning.
Collection Statute Expiration Date (CSED)
The statute of limitation on collection gives the IRS tenyears to collect tax from the time it is assessed. The date on which the ten year period expiresis called the CSED. After assessment andbefore the CSED the IRS may levy or begin a court proceeding. The levy is the administrative collectiontool given to the IRS that allows it to take property without a courtproceeding. The IRS may levy wages, bankaccounts, and other property. If the IRSdoes not collect the tax by levy, it may resort to using the courts. As federal court cases often last for many years,the statute requires only that the proceeding begin within before the CSED. The consequences may extend for several decades.
Events that Extend the CSED
Many administrative requests prevent the IRS from collectingtax. Some ill-advised taxpayers will makethese requests purely to delay paying the tax.This is usually an ineffective strategy.During the time the IRS is prohibited from collecting, the CSED isextended. Moreover, some events give theIRS extra time to recover. Making theserequests purely to create a delay may also have serious consequences beyond thescope of this article. The most common eventsthat extend the CSED are below.
CollectionDue Process (CDP). CDP is an important taxpayerright and having a CDP hearing often resolves collection cases. It prevents the IRS from improperly taking collectionaction and does not allow collection while the request is pending. I’m typically seeing the IRS backlogged aboutsix months between a CDP request and the hearing. The CSED is extended for that entire time. If CDP is necessary to preserve a taxpayer’srights, that’s a small tradeoff, but if there is another way to achieve thesame outcome, that may be preferable in some cases.
Offer In Compromise (OIC). OIC’s are appealing to taxpayers, but not as easy as advertisers would indicate and the IRS backlog is six months on these as well. The CSED is extended the entire time the OIC is pending and for another 30 days after rejection. See my earlier posts about the OIC process and compliance requirements before committing to extending the CSED for so long.
InstallmentAgreement (IA). The time during which anIA is pending extends the CSED. Once theIA is approved, the clock starts running again.Fortunately, this processing time is usually short and IA’s oftenresolve the liabilities, rendering the CSED irrelevant.
InnocentSpouse Relief. While a request forrelief is pending or on appeal, the government is prevented from takingcollection action against the requesting spouse. The non-requesting spouse, whose liabilitycan not decrease in this proceeding, is not protected from collection and consequentlysees no change to the CSED. Because ofthe three types of innocent spouse relief and complex possibilities of appealsin these cases, I won’t go into the details, but understand that while the IRSis restricted from collection, the requesting spouse’s CSED is extended. These cases may take years to resolve and therequesting spouse often experiences dramatic financial changes during that time,so extending the CSED for so long can be an important consideration.
Bankruptcy. Bankruptcy may resolve the debt and renderthe CSED moot, but if not, the IRS will have much longer to collect. When a debtor files a bankruptcy petition, theIRS is prohibited from collection. Atthe end of the case, when the stay is lifted and the IRS can collect again, theCSED is extended for the time of the stay plus six months. Many tax debts are not discharged inbankruptcy, so while the taxpayer may have a fresh start with some creditors, taxcollection may just be starting. It isimportant to analyze whether tax debts will be discharged when considering abankruptcy and have counsel advise you before making such a big decision thatdepends on many small details.
Agreeing to Extend the CSED. At first, allowing IRS to collect tax after the law would otherwise prohibit it might seem foolish, but it could be a sensible option in certain circ*mstances. If a taxpayer can not afford to fully pay the liability before the CSED but will experience a change in financial condition after the expiration of the CSED, an agreement to partially pay now and pay the rest later could be better than risking court proceedings before the CSED.
Court proceedings
Like other creditors, the government can take action throughthe courts. When the specialadministrative actions given to the IRS are inadequate to collect the debt, thegovernment may resort to these costlier methods. Specifically, if the CSED will expire beforethe IRS can collect from a taxpayer who has or likely will have significantassets, the government can reduce the assessment to judgment. This creates a court judgment against the debtorand gives the government new collection powers.Although this has several consequences, we’ll stay focused on the CSEDand not stray into the expansive Federal Debt Collection Procedures Act. The IRS maintains that once the judgment isobtained, the CSED is extended INDEFINITELY and they can levy until the debt issatisfied.
Conclusions
The ten-year statute of limitation on collection is importantto manage carefully. Filing a return to getthe clock started is essential. Manycommon taxpayer approaches to resolution result in extending the statute andshould be evaluated with respect to the CSED and larger strategy. Finally, taxpayers should not assume they’llbe clear at the CSED because it is possible for the government to begin a courtproceeding before the CSED and continue collection for decades. Rather, taxpayers should seek experiencedcounsel to plan strategies for their unique situations.
