The United States federal government and the State of Michigan have very different statutes and regulations regarding the time limit for collecting on assessed taxes. Generally, the Internal Revenue Service may collect taxes due by levy or court proceeding, “but only if the levy is made or the proceeding begun within 10 years after the assessment of the tax.” 26 U.S.C. §6502(a)(1). After the ten-year statute of limitations expires, the IRS is prohibited from further collection and the past due balance, penalties and interests are wiped away from the books. However, there are number ways that the ten-year limit can be extended under the Internal Revenue Code. For example, the statute of limitations may be extended for time periods that the taxpayer is in bankruptcy court, is outside the United States for a continuous period of six months or by the length of time that the collection action is pending in court. It may even be extended by written agreement of the taxpayer and the IRS (e.g. pursuant to an installment payment agreement). Even if the federal government is successful in making a play for additional time to collect, it cannot pursue the tax debt forever.
Does the State of Michigan have any such time limitations on collecting past due taxes that were assessed?
Unlike the Internal Revenue Code, there is no provision in Michigan Complied Laws that states that the taxpayer’s debt to the state is extinguished or that the Michigan Department of Treasury loses the ability to collect the assessed tax after a certain period of time. There is a general, catch-all statute of limitations for court actions that states:
- “All other personal actions shall be commenced within the period of 6 years after the claims accrue and not afterwards unless a different period is stated in the statutes.” MCL 600.5813.
Is there a six-year statute of limitation on the Department of Treasury to collect tax debt?
In Nagle v Department of Treasury, unpublished per curiam opinion of the Court of Appeals issued August 8, 2017 (Docket No. 333850), the Plaintiff owed a total of $406,075.09 in taxes and interest to the Michigan Department of Treasury from his 2004, 2006, 2007 and 2009 tax returns as assessed. In 2016, the State of Michigan intercepted funds payable to the Plaintiff to apply to the tax debt and recorded liens against his real property. In response, the Plaintiff filed suit in the Michigan Court of Claims seeking return of the intercepted funds and to remove the recorded liens. He alleged that the statute of limitations in MCL 600.5813 prevented collection on his tax liability because more than six years have passed since the taxes were assessed in each tax year. The Department of Treasury filed a motion for summary disposition to dismiss the lawsuit on the grounds that MCL 600.5813 only limits the ability to file a civil suit but does not limit the power to take administrative action and efforts to collect the taxes by other means. The Court of Claims agreed with the State of Michigan and dismissed the lawsuit. The Plaintiff appealed, and the Michigan Court of Appeals determined the following:
- “[W]hile defendant had the right to sue plaintiff to collect on tax assessments that were final and conclusive, defendant’s failure to exercise that right does not lead to the conclusion that defendant forfeited its other rights with regard to collection of plaintiff’s outstanding tax debt. Moreover, we reject plaintiff’s claim that it would be an “absurdity” if defendant had the right to seek the recovery of his outstanding tax debt beyond the six-year time period set forth in MCL 600.5813. Plaintiff has failed to name any kind of debt—tax or otherwise—that is discharged or extinguished merely because it is ignored and unpaid by the debtor for a specific period of time. Accordingly, as the Court of Claims held, defendant had the right to assert tax liens related to plaintiff’s tax liability and the funds defendant intercepted that were payable to plaintiff could properly be applied as a setoff to reduce plaintiff’s significant outstanding tax liability.”
In short, the Department of Treasury does not have ANY statute of limitations with regards to collecting a tax debt if it uses any means other than civil litigation. Michigan is free to intercept funds, conduct administrative setoffs, issue levies, and record liens against any real and personal property.
However, there are two circumstances where this statute of limitations to file civil suit can be extended:
- If the taxpayer makes a partial payment on the tax debt, it can restart the statute of limitations period to file suit from the date of the partial payment. MCL 600.5865. In Yeiter v Knights of St Casimir Aid Society, 461 Mich 493, 497 (2000), the Michigan Supreme Court held that a partial payment on a loan restarted the six-year statute of limitations period under MCL 600.5813. “[I]t is not accurate to say…, that a partial payment on a debt begins the limitation period anew only if accompanied by a recognition of the entire debt and an indication of an intention to pay same. Indeed, the opposite is true — a partial payment restarts the running of the limitation period unless it is accompanied by a declaration or circumstance that rebuts the implication that the debtor by partial payment admits the full obligation.” Id at 497-498.
- If the taxpayer makes a written acknowledgment that a tax debt is owed, it can restart the statute of limitations from the date of the writing. “Express or implied contracts which have been barred by the running of the period of limitation shall be revived by the acknowledgment or promise of the party to be charged. But no acknowledgment or promise shall be recognized as effective to bar the running of the period of limitations or revive the claim unless the acknowledgment is made by or the promise is contained in some writing signed by the party to be charged by the action.” MCL 600.5866.
If the Department of Treasury does file suit and is successful in obtaining a judgment, then they can have up to 10 years to collect on the balance of the judgment. They may be eligible to renew the judgment for another 10-year period if done before the first period expires.
Although there is no hard statute of limitations on collection, a Michigan taxpayer may have some options to temporarily suspend the Department’s collection efforts:
- OFFER-IN-COMPROMISE: Beginning January 1, 2015, a taxpayer may make an application to the Department of Treasury to settle tax debt for less than what is owed. The Department “shall not levy against property to collect a liability while an offer to compromise is pending unless the state treasurer, or an authorized representative of the state treasurer, has determined that the taxpayer’s offer to compromise was intended to delay collection of the tax.” MCL 205.23a(7). While the Department will suspend most collection activities while considering an offer-in-compromise, it does not affect the status of any liens filed against real or personal property unless accepted.
- ADMINISTRATIVE HOLD DUE TO LITIGATION: If a tax assessment is timely appealed to the Michigan Court of Claims or the Michigan Tax Tribunal, then all collection activities are suspended until there is a final resolution of the matter.
- BANKRUPTCY: When a taxpayer files a bankruptcy petition (particularly under Chapter 7) in federal court, an “automatic stay” goes into effect and precludes almost all creditors from engaging in collection activities, including the Department of Treasury. Under very limited circumstances, it may be possible to discharge state income tax debt under the Bankruptcy Code. If the debt is not discharged, collection efforts can resume after the case is concluded.
A tax debt owed to the State of Michigan will not go away by putting your head in the sand. A skilled tax lawyer may be of assistance in dealing with the Department of Treasury and helping you put your tax issues behind you. If you have questions about Michigan taxation or need legal representation, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.
