IRS TAX DEBT COLLECTION STATUTE: WHY FILING TAX RETURNS ON TIME IS IMPORTANT
Did you know that the IRS only has a certain number of years to collect on a taxpayer’s debt? This time limit is called the Statute of Limitations. The underlying reason for this policy is the idea that a tax system without some sort of deadline for final settlement would be inefficient and ill-advised. As the Supreme Court stated in 1946, “…the right to be free of stale claims in time comes to prevail over the right to prosecute them.” There are exceptions to all the general rules, and this blog post will outline the basic rules of IRS collection statutes, followed by some common exceptions to those basics.
When does the IRS statue of limitations clock start ticking?
The clock starts ticking on the IRS’s deadline for collection at the time your tax liability is “assessed”, meaning the IRS has officially recorded your name, address, and tax liability. Backing up one step, however, there is actually a statute of limitations on how long the IRS has to assess your tax liability. The IRS must assess your taxes within 3 years after your tax return is filed (subject to some exceptions, discussed below). Otherwise, the IRS is prohibited from taking any action to collect on that tax debt. This is why you should file your tax returns even if you know you can’t pay the tax.
No statute of limitations applies if you do not file a tax return. Instead, the IRS can simply file a substitute return for you based on required information they receive from other sources, such as your employer or investment bank. It’s to your advantage to file your return and let the clock start ticking on the IRS’s time limits.
How long does the IRS have to collect on your income tax debt?
The general rule is that once your tax liability has been assessed, the IRS has ten years to collect on the debt. If the IRS hasn’t collected the tax before they end of the ten-year period, it must take the taxpayer to court in order to turn the tax assessment into a court judgment that is still collectible past the statute of limitations. The IRS outlines the 10-year collection statute in its Internal Revenue Manual (IRM): IRS collection IRM.
A tax lien does not necessary have a statute of limitation. When a lien is asserted by the IRS against a property, it does not expire when the collection statute expires. Typically, when the statute of limitations for collection expires, a taxpayer can negotiate with the IRS to release the liens filed against them. Alternatively, if there is significant equity in property, the IRS may determine that the liens will not be released.
What are some common exceptions to the three-year period of limitations on assessment?
There are some exceptions to the three-year assessment general rule. The following circumstances will have an impact on the statute for assessment:
- False or Fraudulent Return — If a taxpayer files and false or fraudulent return with the intent to evade tax, there is no statutory limitation. In other words, the IRS can assess the tax liability or bring an action in court against the taxpayer at any time.
- Failure to File a Return — If a taxpayer failure to file a return at all, even innocently or out of neglect, there is no statutory limitation.
- Substantial omission from tax return — When a taxpayer substantially underreports income or assets, the time limit for assessment is extended from three to six years.
- Request for prompt assessment — If a taxpayer needs the IRS to assess the tax sooner than the three-year period, the taxpayer can give the IRS a written request for prompt assessment and shorten the statutory limitation to eighteen months. However, this shortened period can only be obtained in certain cases, defined by IRC section 6501(d).
- Extension by Agreement — The period of limitations on assessment may be extended for any tax but estate tax if there is an agreement in writing between the taxpayer and the IRS. This can happen in cases of an IRS audit or appeal of a tax liability.
What are some common suspensions and extensions of the IRS ten-year period for collection?
Similarly, there are circumstances that may extend the 10-year collection statute. Some of the major ways that the statue is extended are as follows:
- Deficiency Procedures — The basic rule is that when the IRS mails a notice of income tax deficiency, the statute of limitations for assessment and collections is extended for 90 or 150 days, depending on whether the addressee is within the United States or outside the United States. If that taxpayer files a Tax Court petition to contest the liability, the statute of limitations is suspended until the Tax Court makes a final decision on the case and for sixty days afterward.
- Offers in Compromise — Though the actual suspension language has been removed from the Offer in Compromise (OIC), when a taxpayer submits an OIC the IRS will typically suspend the statute of limitations while the OIC is in under consideration. This is so the IRS has time to consider the offer without suffering loss of time to collect the debt if the offer is rejected or withdrawn.
- Bankruptcy — When a taxpayer files for bankruptcy, the statute of limitations for both assessment and collection is suspended for as long as the IRS is prohibited from assessing and collecting under the Bankruptcy Code. The statute also provides an additional 60 days for assessment after this suspension and six months for collection.
If any of these items above apply, then you will need to check with the IRS to determine your actual collection statute expiration date.
Contact a Los Angeles Tax Attorney for Free Consultation
If you have an overdue tax debt or questions about the IRS’s statute of limitation for the collection of that debt, contact a Los Angeles tax attorney at Disparte Tax Law today for a free consultation.