The Statute of Limitations Can Cut Your Tax Debt

Many people think that the IRS can collect back taxes until they die. It isn't as bad as that.

The Statute of Limitations limits the time for IRS tax collection activities. Generally, there is a 10-year Statute of Limitations for the IRS collecting tax.

However, your state tax law that will apply to any taxes you owe to your state may be very different. For example, California has NO Statute of Limitations on the collection of back taxes even though California's tax system mirrors the federal system in many ways.

If the tax return was prepared by the IRS, (this kind of return prepared by the IRS is called a "Substitute for Return" or SFR and is done under the authority of Section 6020(b) of the Tax Code) then the Statute of Limitations does not apply. This is another good reason to get your returns filed even if you can't pay the tax.

The Statute of Limitations does not apply in the case of a false tax return or fraudulent tax return filed with the IRS with intent to evade any tax. See Section 6501(c)(1) of the Tax Code and Section 301.6501(c)-1 of the Tax Regulations.

For assessments of tax or levy made after November 5, 1990, the IRS cannot either collect or levy any tax 10 years after the date of assessment of tax or levy. Court proceedings must also be started by the IRS within the 10-year Statute of Limitations. If the IRS takes you to court they can obtain a judgment which will have a Statute of Limitations of its own effectively extending the time the IRS has to collect.

The 10-year Statute of Limitations can be extended by agreement between the taxpayer and the IRS provided the agreement is made prior to the expiration of the 10-year period.

The 10-year period begins to run with the date of the “assessment,” not the tax year for which taxes are due. For example, if the return for 1996 is not filed until 1999 and the tax is assessed in 2000, the 10-year period begins to run in 2000 and expires in 2010.

The date of assessment is the date the tax liability is assessed by IRS personnel by completing a particular form at an IRS Service Center. When the applicable form is signed by an IRS official, the 10-year period for that tax liability begins to run. Later additions of interest and late payment penalties (as well as other penalties) added to the underlying tax debt must be collected within the same 10-year time frame.

When Does the Statute Begin?

To determine when the collection period begins for your liability, the best way is usually to obtain a transcript of your account from the IRS. Transcripts should exist for each tax year and provide basic information such as the date of assessment, date of filing, and tax liability.

Tax Practitioners can order transcripts using the IRS Tax Hotline in their local jurisdiction, but only if a Power of Attorney has been filed. Taxpayers can request transcripts on their own behalf by filing IRS Form 4506.

The IRS does not notify a taxpayer that the tax liability is no longer collectible, even though the IRS´s internal records may reflect that the debt has been discharged.

Similarly, if tax liens have been filed, those liens could still be on file with the local recording office, even though they can no longer be enforced. You can still have adverse credit reports. So, the lesson here is to be proactive about staying on top of the IRS activities and non-activities.

In some cases, the IRS will voluntarily file a Release of Lien and not inform the taxpayer.

10 Years Is Not Always the Limit

There are a number of other ways the 10-year collection period may be extended. For example, during the period an Offer in Compromise is pending, the Statute of Limitations is extended. Similarly, if bankruptcy is declared, while the bankruptcy proceeding is pending, the 10-year Statute of Limitations on collection is extended by the duration of the bankruptcy proceeding.

Many types of court actions may also suspend the running of the 10 years. The filing of an IRS levy or a judgment entered in a Federal Court in a suit by the Department of Justice can also extend the 10-year period. The IRS can ask the Department of Justice to institute a collection proceeding in Federal District Court. If such a proceeding is begun and the United States Government prevails, then the Statute of Limitations on collection on that judgment is extended for the period generally allowed to collect such judgments, and such judgments can be renewed subject to the discretion of the Court.

If you need help with a Statute of Limitations problem, please call.  

Ralph Sayers, CPA

(877) 316-4331

ralphs@tampabay.rr.com