Did you know that there is a statute of limitations for IRS collections?
Before you decide to just run out the clock on your tax debt, you should fully understand how the IRS statute of limitations works and the different classifications, their duration and how circumstances like bankruptcy can change the game.
Trying to understand the IRS statutes of limitations can be tricky, which is why I advise you to check in with me so I can thoroughly explain to you how the statute of limitations affects your tax situation.
If you still need more information, join me as I cover everything there is to know about the IRS collections statute of limitations …
WHAT IS THE IRS STATUTE OF LIMITATIONS?
The IRS Statute of Limitations refers to the period of time during which the Internal Revenue Service (IRS) may legally collect taxes, penalties, and interest from a taxpayer. The standard statute of limitations for tax debts is 10 years, beginning from the date the tax return was filed or tax was assessed, whichever is later.
Additionally, Merriam-Webster defines statute of limitations as:
“a statute assigning a certain time after which rights cannot be enforced by legal action or offenses cannot be punished.”
Examples include filing a lawsuit after a traffic accident or for medical malpractice. The premise is that after a given amount of time, evidence, recall of the incident, credibility of witnesses, etc., will be diminished.
While the IRS collection process can be a long and drawn-out affair, it doesn’t have to be, and the IRS statute of limitations on collections won’t last forever.
HOW LONG CAN THE IRS COLLECT BACK TAXES?
Generally, under IRC § 6502, the IRS can collect back taxes for 10 years from the date of assessment. 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.
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.
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UNDERSTANDING THE IRS COLLECTION STATUTE EXPIRATION DATE (CSED)
The Collection Statute Expiration Date (CSED) is the deadline for the IRS to collect unpaid taxes. Under Internal Revenue Code (IRC) § 6502(a), the IRS generally has 10 years from the date a tax is assessed to collect the debt. Once this time runs out, the IRS can no longer pursue the collection of the liability (“Collection Statute Expiration,” IRS.gov).
However, certain events can pause or extend the 10-year deadline, and these exceptions are specific to the taxpayer’s actions. For instance:
- Filing for bankruptcy (pauses the clock during the case, plus an additional 6 months).
- Submitting an Offer in Compromise (pauses while under review).
- Requesting an installment agreement (pauses during the review process).
- Being outside the U.S. for 6+ months (pauses the countdown).
These procedures are laid out in the Internal Revenue Manual (IRM) Section 5.1.19 under Part 5, Chapter 1, Section 19, as well as in the Restructuring and Reform Act of 1998 (RRA 98).
In summary, while the IRS generally has a 10-year limit to collect taxes, actions by the taxpayer can extend this period.
TOLLING THE CSED
If the taxpayer responds with the below actions, 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”):
- Filing an offer-in-compromise
- Bankruptcy
- Application for a Taxpayer Assistance Order (TAO)
- Voluntary waiver of the statute of limitations
- Collection due process appeal
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.
Putting an installment agreement in place can be a helpful way to manage & mitigate IRS problems in general.
IRS STATUTE OF LIMITATIONS & BANKRUPTCY
If you file for bankruptcy, the IRS pauses the 10-year collection clock because of the automatic stay, which prevents them from collecting during the case.
“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”).
In simple terms, the IRS extends the collection deadline for the entire time your bankruptcy case is active—plus an extra six months after it ends.
If you file for bankruptcy, the IRS pauses the 10-year collection clock from the time you file until the case is either completed (discharged) or thrown out (dismissed). However, this extension only applies to taxes that are still owed after bankruptcy—any tax debt that gets wiped out in bankruptcy is not affected.
OFFER IN COMPROMISE & THE IRS AUDIT STATUTE OF LIMITATIONS
If you submit an Offer in Compromise (OIC) to settle your tax debt for less than you owe, the IRS pauses the 10-year collection clock while they review your offer.
The clock stays paused:
- While your OIC is being considered.
- For 30 days after a rejection.
- During an appeal if you challenge the rejection.
Once the process is over, the IRS adds an extra 30 days to the collection deadline.
OUT OF COUNTRY STATUS
If a taxpayer lives outside the U.S. for at least six months, the IRS pauses the 10-year collection clock under IRC 6503(c).
“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”).
This means the IRS extends the collection deadline until six months after the taxpayer comes back to the U.S., potentially delaying it for a long time.
HOW FAR BACK CAN THE IRS AUDIT YOU?
In general, the IRS can audit returns filed within the last three years. In some cases, the IRS can also review returns filed within the past six years if they suspect substantial errors or fraud and where the taxpayer failed to report more than 25% of their gross income.
In some cases, there is no limitation on how far back the IRS can audit, such as in cases of unfiled tax returns or intentional tax evasion.
HOW FAR BACK CAN THE IRS GO FOR UNFILED TAXES?
The IRS can go back six years to audit and assess additional taxes, penalties, and interest for unfiled taxes. However, there is no statute of limitations if you failed to file a tax return or if the IRS suspects you committed fraud.
This effectively means that the 10-year IRS audit statute of limitations restriction doesn’t apply if you haven’t filed your tax return i.e., you’re completely open to investigation at this point without a date restriction.
DOES THE IRS FORGIVE TAX DEBT AFTER 10 YEARS?
Yes, after 10 years, the IRS forgives tax debt. After this time period, the tax debt is considered “uncollectible”. However, it is important to note that there are certain circumstances, such as bankruptcy or certain collection activities, which may extend the statute of limitations.
Additionally, tax debt forgiveness after 10 years can lead to any of that forgiven tax debt having tax consequences, such as being treated as taxable income for the year in which it was forgiven.
SO, HOW LONG DO I KEEP MY TAX RETURNS?
Keep your tax returns and supporting documents for at least three years from the date of filing or the due date of the tax return, whichever is later. If there are tax return discrepancies or if there is a need to claim a refund, keep the tax documents for up to 7 years.
Some documents, such as real estate records, stock transactions, and retirement plan contributions may need to be kept for a longer period.
But, keep in mind that since the IRS has 10 years to collect a liability from the assessment date, it might be beneficial to you to retain your records for this time period.
Either way, you should always be aware of tax debt relief options available to you and why keeping records is always important.
If you’re unsure as to how this applies to your situation, get in touch with us so we can get a better understanding of your tax affairs.
CONCLUSION ON THE IRS COLLECTION STATUTE OF LIMITATIONS
In some circumstances, an IRS statute of limitations will work to your advantage. That is why I encourage you to reach out to me if you want to learn how it could apply to your situation.
I can also advise you on the different types of IRS repayment options to determine which one would be best for you. Then, we can see how any statutes of limitations would extend your repayment time. It is definitely worth looking into.
[1] Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration.
[2] The subject of Offer in Compromise is further discussed in Part 3 of Chapter 7: What If I Can’t Pay in Full?