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What Is The Statute Of Limitations For The IRS To Collect A Tax Debt?

 

As Benjamin Franklin once said, the two certainties in life are death and taxes.  If you owe money to the Internal Revenue Service, it certainly feels that this debt is a cloud that hangs over you forever until the federal government gets its money.  You may have tried every legal tactic to get out of the specter of crushing federal tax liabilities, but you still cannot break free and you feel trapped.  Fortunately, the IRS is limited by federal law in how long they can take to collect on an assessed tax debt.  For many taxpayers, this statute of limitations might be the saving grace they are looking forward to for starting over.  However, given the loopholes in the Internal Revenue Code, calculating when the “collection statute expiration date” (CESD) will be is easier said than done.

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).  However, the Internal Revenue Code is riddled with many exceptions, loopholes and tolling periods that can extend the CSED long after the ten-year period has expired.  The most significant reasons for an extension include, but are not limited to, the following:

  • INITIAL 60-DAY PERIOD AFTER NOTICE OF DEFICIENCY AND TAX COURT PROCEEDINGS: The period of limitations for IRS collection is suspended for the initial 60-day period after the IRS issues a notice of deficiency to the taxpayer. If there is a proceeding commenced in the U.S. Tax Court with respect to the notice of deficiency, the period of limitations is suspending from the date that the proceeding is placed on the docket until the Tax Court decision becomes final, PLUS 60 days afterwards.  26 U.S.C. §6503(a)(1).
  • ASSETS OF TAXPAYER IN CONTROL OR CUSTODY OF A COURT: The period of limitations for IRS collection is suspended for the period that the assets of the taxpayer are in control or custody of the court in ANY proceeding before ANY court of the United States, any state or the District of Columbia, AND for 6 months afterwards. 26 U.S.C. §6503(b).
  • TAXPAYER OUTSIDE OF UNITED STATES: The period of limitations for IRS collection is suspended for the period during which the taxpayer is outside of the United States for a continuous period of a least 6 months. When the taxpayer returns to the United States, the IRS has 6 months after the date of return for collection EVEN if the statute of limitations would have normally expired during that 6-month period.  26 U.S.C. §6503(c).
  • WRONGFUL SEIZURE OF THIRD-PARTY PROPERTY: The period of limitations for IRS collection is suspended for the period during which the IRS seized wrongfully third-party property to pay a tax debt. The suspension period starts on the day the property is seized and ends on the day the property is returned, plus 30 days afterwards.  However, the period is only suspended with respect to the amount of the tax assessment that is equal to the amount of money or value of third-party property returned.  26 U.S.C. §6503(f)(1).
  • WRONGFUL LIEN AGAINST THIRD-PARTY PROPERTY: The period of limitations for IRS collection is suspended for the period during which the IRS wrongfully placed a lien on third-party property to secure a tax debt, including any time the IRS spent on litigation to reduce the lien to a judgment. The suspension period starts on the day the lien was placed on the property and ends on the date that the lien is released or judgment regarding the property is final, plus 30 days afterwards.  However, the period is only suspended with respect to the amount of the tax assessment that is equal to the amount of the lien interest that the government had in the property plus interest, penalties and additional tax amounts.  26 U.S.C. §6503(f)(2).
  • TAXPAYER IN BANKRUPTCY: The period of limitations for IRS collection is suspended for the period during which the taxpayer enjoys an automatic stay from all collection efforts by filing bankruptcy AND for 6 months afterwards. 26 U.S.C. §6503(h)(2).

Taxpayers who are on active duty in the military or serve in an active combat zone may be eligible to defer collection efforts under the Servicemembers Civil Relief Act, 50 U.S.C. 511 et. seq., but that time period also suspends the statute of limitations for collection and extends the CSED.

In addition, the statute of limitations can be extended by VOLUNTARY written agreement between the taxpayer and the IRS beyond the normal 10-year window.  Now, why would any taxpayer in their right mind voluntarily agree to give the federal government more time to execute collection on an already-crushing tax debt?  Often, these agreed-upon extensions are a result of the taxpayer taking other voluntary action to try and resolve the tax assessment.  These include the following:

  • INSTALLMENT AGREEMENT: The taxpayer might apply for an installment agreement with the IRS to pay the amount due over an extended timeframe. If approved, these payment plans can help the taxpayer avoid additional interest, penalties and reductions to future tax refunds.  The Internal Revenue Code suspends the IRS’s ability to levy during the period that the IRS is considering an installment agreement, suspended for 30 days after the installment agreement is rejected or terminated, and suspended during any time period that the rejection or termination of the installment agreement is appealed.  26 U.S.C. §6331(k)(2).  This also suspends the statute of limitations for collection and extends the CSED during that period.  26 U.S.C. 6331(i)(5).  However, the Internal Revenue Service often makes these installment agreements conditional on the taxpayer signing Form 900 (Tax Collection Waiver) which could extend the CSED up to 5 years, plus another one year to account for administrative proceedings.
  • OFFER IN COMPROMISE (“OIC”): The taxpayer might make an offer in compromise to the IRS to settle the tax debt for less than the money owed if full payment will create a financial hardship. The Internal Revenue Code suspends the IRS’s ability to levy during the period that the IRS is considering an OIC, suspended for 30 days after the OIC is rejected, and suspended during any time period that the rejection of the OIC is appealed.  26 U.S.C. §6331(k)(1).  This also suspends the statute of limitations for collection and extends the CSED during that period.  26 U.S.C. §6331(i)(5).
  • COLLECTION DUE PROCESS (“CDP”) HEARING: When the IRS intends to levy, they must first issue a formal notice and advise you of your right to a CDP hearing with the IRS Independent Office of Appeals. If a hearing is requested, the statute of limitations for collection is suspended and the CSED is extended “for the period during which such hearing, and appeals therein, are pending”, and then 90 days after the final determination is made.  26 U.S.C. §6330(e)(1).
  • INNOCENT SPOUSE RELIEF: A taxpayer seeking protection from a joint income tax liability might seek protection as an “innocent spouse”. If a request for innocent spouse relief is filed, the statute of limitations for collection is suspended and the CSED is extended for the period 90 days after the request is filed (or for any Tax Court proceedings thereafter until the decision is final) and then for 60 days thereafter.  26 U.S.C. §6015(e)(2).
  • REQUEST FOR ASSISTANCE FROM TAXPAYER ADVOCATE: When other options for resolution fail, the taxpayer may file a Request for Taxpayer Assistance Order with the Office of the National Taxpayer Advocate. If a request for assistance is filed, the statute of limitations for collection is suspended and the CSED is extended for the period that the application is pending and “any other period specified by the National Taxpayer Advocate in a Taxpayer Assistance Order issued pursuant to such application.”  26 U.S.C. §7811(d).

The Internal Revenue Service used to be very heavy-handed in coercing taxpayers enter into a “voluntary” extension waiver with Form 900 (Tax Collection Waiver) under threat that they would commence or continue levy actions.  However, the Internal Revenue Code was amended to limit the IRS to request waivers under two circumstances:

  • The waiver is related to an installment agreement between the taxpayer and the IRS that would cause payments to extend beyond the normal statute of limitations period. 26 U.S.C. 6502(a)(2)(A).
  • The waiver is related to an agreement between the taxpayer and the IRS to release a levy after the expiration of the statute of limitations. 26 U.S.C. 6502(a)(2)(B).  This can occur if the taxpayer is close to the CSED but the IRS discovers assets worth executing a levy upon but otherwise works out a compromise with the taxpayer.

If more than one of the circumstances suspends the statute of limitations and those suspensions overlap, then the CSED is extended only once for the period that the suspensions overlap.  For example, if a taxpayer who has filed for bankruptcy has also applied for an offer in compromise at the same time, then the CSED is only extended once for each day of suspension, not multiple days for the same single day due to multiple reasons.

While installment payments, offers in compromise and other litigation to contest the tax assessment can extend the statute of limitations for the IRS to collect, obtaining “Currently Non Collectible” (CNC) status DOES NOT.  If the federal government designates your account as non-collectible, it stops all efforts of the IRS to collect on the tax debt for a temporary basis.  This freezes all collection letters, phone calls, seizures and levies.  Ideally, a taxpayer with no other options would try to obtain CNC status for the duration of the 10-year statute of limitations, after which the taxpayer will be home-free with a clear slate.  However, beware that the IRS may discover that the taxpayer’s financial situation has improved based on your tax returns and make force him or her to submit additional documentation to determine if CNC status should continue.

If you are facing crushing federal tax debt, you can benefit from the advice and guidance of a skilled tax lawyer.  Before accepting any offer from the IRS to extend the statute of limitations, a tax professional can tell you if that is the appropriate action to take for your situation, even if related to an installment agreement or a release of levy.  In addition, a tax lawyer can help you determine your CSED to see if you should simply wait out the statute of limitations period before dealing with the IRS.  If you have questions about federal taxation or need legal representation, do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.

 

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