If you have filed a bankruptcy, your IRS statute of limitations may be affected. Most people who are considering bankruptcy are doing so for a fresh start. The IRS also offers the Offer in Compromise as a fresh start for those who qualify. However, what people may not realize is that filing a bankruptcy petition can have important ramifications for their taxes. In other words, does bankruptcy extend the IRS statute of limitations?
The IRS generally has three years to assess taxes against taxpayers. This timeline is known as the IRS statute of limitations on assessment. Internal revenue code 6501 governs these statutes.
What is the IRS Statute of Limitations for Assessment?
The IRS generally has a strict time limit to make an assessment of a taxpayer. The Service assesses through the IRS audit process. An IRS agent will examine a taxpayers books and records to determine whether to propose any adjustments. Moreover, this can be a very invasive and stressful experience. However, what can you do to prepare for an IRS audit? Most people do not feel it is justified if the IRS audits tax years that are too old. They may not have the books and records to prove their returns are accurate because of the passage of time. Memories fade and become unreliable. Documents and receipts can fade with the passage of time. Banks don’t keep bank records after the passage of time.
With that in mind, IRC section 6501 limits the time that the IRS has to audit a taxpayer’s return. IRC 6501(a) states that the IRS can’t assess tax after three years from the date the taxpayer filed his or her tax return.
Therefore, the general rule states that the IRS has three years to conduct an audit and make an assessment. Important exceptions to the general three year rule exist. However, the three year rule is the starting point.
Does a Bankruptcy Extend the IRS statute of Limitations?
When the debtor files a petition with the bankruptcy court, the debtor receives the protection of the automatic stay. The automatic stay arises as a matter of law and with certain exceptions suspends most collection activity. Moreover, the automatic stay applies to all entities, including governmental units.
The automatic stay prohibits acts to collect taxes that arose before the bankruptcy filing. IRS collection actions such as serving Notices of Federal Tax Lien or Levy are prohibited if they were intended to collect pre-bankruptcy debts or property of the estate. The automatic stay also stops the commencement or continuation of civil actions, including certain Tax Court cases.
The automatic stay does not prohibit the IRS from determining the amount of a tax that a taxpayer owes. Additionally, the automatic stay does not prohibit:
- An audit to determine tax liability,
- A demand for tax returns,
- The issuance of a Notice of Deficiency, or
- Assessing a tax and sending a notice and demand for payment.
Assessment is the statutorily required recording of a tax liability. During a bankruptcy case, the IRS may make an assessment of tax due and issue a notice and demand for payment. This grant of authority is a specific exception to the “automatic stay” rules discussed below.
Accordingly, after the IRS, Tax Court, or District Court determines the correct amount of tax, bankruptcy court, or Tax Court, the IRS may assess the tax due against the bankruptcy estate and issue a notice and demand for payment.
Statute of Limitations on Collections
Statute of limitations for collection. In a bankruptcy case, the period of limitations for collection of tax (generally, 10 years from the date of assessment) is suspended for the period during which the IRS is prohibited from collecting, plus 6 months thereafter.
Bankruptcy can help taxpayers who have tax debts. It can offer a fresh start and a way to allow taxpayers to move forward financially. Bankruptcy can discharge tax debts in some cases. If you have questions, contact us today.