IRS—Statute of Limitations

The IRS has rules, just like taxpayers.  An important one for those who have a balance due is called the Statute of Limitations.  The Statute of Limitations is a rule that states the IRS, by law, only has 10 years to collect a tax that has been assessed.  But then again, we are dealing with tax laws so, of course, it’s not quite that simple. As usual there are rules and exceptions to the rule of the ten year Statute of Limitations for collections.

It is a real law, so it’s well worth understanding the IRS Statute of Limitations.  This statute only applies to taxes that have been assessed, so the first thing that must happen is that a tax return needs to be filed to start that 10 year clock ticking.  If you don’t file, the IRS has no limit on how long they can go after that year.

As a side note, if you have a refund coming for an old tax year, you ONLY have 3 years to file a claim for that refund (file a tax return), and if you don’t file for the refund within the 3 year period, you lose it (by law).  You can tell who writes the laws.  But I digress.

An odd quirk is that all individual income tax returns that are filed by April 15th are deemed filed on April 15th and that’s when the Statute of Limitations starts running.  For instance, if a 2013 tax return is filed on February 10th of 2014 (due date April 15th, 2014) the income tax return is deemed as filed on April 15th, 2014 and not February 10th.

Keep in mind from the example above that the 10 year Statute of Limitations starts the year following the taxable year because that is when the tax year becomes due.  In other words, a 2010 tax return filed on time would have a Statute Expiration of Date April 15, of 2021 (10 years from April 15, 2011, the due date of the return).

If a return is filed late then the 10 year Statute of Limitations starts to run when the IRS assessed the tax for collections.  So a return that has been filed 5 years late will have 10 years from the time the IRS assesses the tax for collections for that year before it expires.  File on time if you can!

If you are audited and there is an additional tax due, the Statute of Limitations for the additional tax is 10 years from when the additional tax was assessed.

There are also events that can extend the 10 year Statute of Limitations.  The IRS calls these events Tolling Events.  For example, if you left the country for an extended period of time to run from IRS collections, the statute is tolled for that period of time.  It just gives them longer to collect, so don’t flee the country!

Other Tolling Events include Bankruptcy.  The time period while you are protected from collections during the Bankruptcy is added to the 10 year statute (plus 6 months).  Same thing for an Offer In Compromise.  While the OIC is being worked, the IRS has to suspend collections, and that time period is added to extend the 10 year statute (plus 30 days).  Certain types of appeals (such as the all-important CDP appeal) also extend the Statute of Limitations.  In addition, litigation can extend the Statute if you file a petition to tax court or the IRS sues the taxpayer for judgment on collecting the tax.

In addition, a taxpayer can “voluntarily” sign a collection statute waiver and extend the Statute of Limitations.  The first thought that comes to most people’s mind is, why?  There are circumstances where it can be a benefit to the taxpayer.  For example, if there was 3 years left on the Statute of Limitations and the IRS started levying your wages it may give cause to sign a waiver.  Let’s say that a payment plan with the IRS that would be within your financial reach would take 5 years to pay off the debt.  In that case, you could be stuck with a levy because the IRS would not accept a five year installment knowing that they only have 3 years to collect the tax.  Therefore, by signing a Collection Statute of Limitations waiver the IRS would be much more willing to extend the payments out over a longer period of time.  Not perfect, but it beats being garnished.

On the other hand, if the Statute of Limitations was going to expire in the next few weeks or a month, I might say to let them have the levy for a few weeks and then let the statute expire.  Maybe it’s time for that vacation?  Once the Statute of Limitations Expires, the taxes just vanish, and the IRS would have to release the levy because there would be nothing to collect.

If you have an old tax liability you may want to find out the actual date it expires before trying to get any type of solution with the IRS.  However, calling to ask them for the information may spark up aggressive collections.  They will almost always ask where you work and where you bank.  A better way to get the information is to request it under the Freedom of Information Act (Anne, please link to that page on the website).  This allows a taxpayer to have access to that type of information without bringing on any unnecessary attention.  By law, the Disclosure Office that replies to the Freedom of Information Act on the IRS’s behalf cannot communicate with other divisions of the IRS (including collections)!

We do this all the time, so if that is a service you are interested in, please give us a call and we can talk about it.  It may be that a little professional advice could make you feel a whole lot better about your tax problem with the IRS! There are certainly many ways to fix a tax problem, and have the taxes expire due to the IRS Statute of Limitations is a great one if the circumstances are right.