Understanding the IRS Statute of Limitations
The IRS statute of limitations is an important concept for taxpayers to understand, as it determines the period during which the IRS can collect taxes, penalties, and interest from a taxpayer. The standard statute of limitations for tax debts is 10 years, beginning from the date the tax return was filed or the tax was assessed, whichever is later. This means that the IRS has 10 years to collect unpaid taxes, interest, and penalties from the date of assessment. However, there are exceptions to this rule, and the statute of limitations can be extended or suspended in certain circumstances.
IRS Statute of Limitations and the Collection Statute Expiration Date (CSED)
The collection power of the IRS is restricted by the irs collection statute of limitations on taxes. This powerful restriction gives the IRS up to 10 years to collect a tax. Once the 10-year period expires, the tax is no longer enforceable and it simply goes away. Related tax liens also disappear, as well as all accrued interest and penalties on the unpaid tax.
The specific date on which the 10 years expires is called the Collection Statute Expiration Date, or CSED.
Reaching the expiration date, or CSED, is big news indeed for a taxpayer who is under a mountain of tax debt.
How Long Can the IRS Collect Back Taxes?
The statute of limitations works like a timer set for 10 years during which the IRS can collect tax debts. The timer starts ticking on the day that the IRS assesses (or processes) the tax. Typically the tax assessment date is within a few days of when the return is received by the government.
For example, if you file your 2022 return on April 10, 2023 and it is processed by the IRS on April 13, 2023, and you did nothing else to extend the statute, then the 10-year period for the IRS to collect the 2022 tax will end on April 13, 2033.
If you file your tax return early, then the 10-year statute of limitations starts on the due date of the return.
The timer will also start if the IRS creates a tax return for an uncooperative taxpayer who did not prepare and submit their own return. This is called a “Substitute for Return.”
If a tax return is audited and the IRS determines that additional taxes are due to the government, then the 10-year statute of limitations for the additional taxes begins when the additional taxes are assessed.
Expiration of the 10-Year Statute of Limitations
The statute of limitations generally expires after 10 years. In other words, the timer stops ticking at 10 years, triggering the expiration of the tax. At that point, the IRS can no longer assess additional taxes or attempt to collect the tax debt.
The IRS will do everything within its power under the law to get a taxpayer to pay their tax debts prior to the 10 year expiration of the statute of limitations. This includes a series of increasingly more severe and threatening notices or letters. These are followed by liens, levies and wage garnishments. The IRS even has the power to cancel your passport for tax debts that are unpaid.
Exceptions to the 10-Year Rule
While the standard statute of limitations for tax debts is 10 years, there are exceptions to this rule. For example, if a taxpayer files for bankruptcy, the statute of limitations is suspended during the bankruptcy proceedings and for six months after the proceedings are completed. Additionally, if a taxpayer applies for an Offer in Compromise (OIC), the statute of limitations is extended for the duration of the OIC process plus 30 days. Other exceptions to the 10-year rule include requesting a collection due process hearing, leaving the country for an extended period, and being convicted of tax fraud.
Extending the IRS 10-Year Statute of Limitations on Taxes
It is generally in the taxpayer’s best interest for the 10-year statute of limitations to continue to run, hastening the date on which the tax expires. However, certain actions will “toll,” or freeze, the statute, preventing it from running. If the statute is not running (like the running of a clock), then the IRS will have more time to collect the tax.
Tax assessments can also affect the statute of limitations. The IRS’s ability to evaluate and determine owed taxes within a specific timeframe is crucial, and certain situations can extend or suspend the limitations period.
Put another way, tolling or freezing the 10-year statute of limitations extends the CSED. It extends the date on which the 10-year statute of limitations expires.
Events that freeze the statute of limitations, giving the IRS more time to collect a tax debt, include:
- Bankruptcy (the statute is extended for the period of bankruptcy, plus an additional six months)
- Filing a Collection Due Process hearing request in response to a Final Notice of Intent to Levy (the statute is extended for 30 days, plus the time until a hearing takes place and a decision is made)
- Filing an Offer-in-Compromise (the statute is extended for however long it takes the IRS to process the Offer in Compromise, plus 30 days)
- Requesting an installment agreement (the statute is extended for the amount of time that the installment agreement is pending)
- The taxpayer lived outside of the United States for at least six months
CPA Pointer #1: Filing a an Offer-in-Compromise with no chance of success is not only a waste of effort and professional fees. It also extends the statute of limitations for no valid reason, giving the IRS more time to collect the tax.
Tolling the Statute of Limitations
Tolling the statute of limitations refers to the suspension of the collection period due to certain events or actions. For example, if a taxpayer files a Taxpayer Assistance Order, the statute of limitations is tolled until the order is resolved. Similarly, if a taxpayer files a lawsuit against the IRS, the statute of limitations is tolled until the lawsuit is resolved. Other events that can toll the statute of limitations include filing a claim for a tax refund, requesting a collection due process hearing, and being out of the country for an extended period.
Tax Relief Programs and the 10-Year Statute of Limitations on Taxes
The time remaining on the 10-year statute of limitations is a critical factor when deciding which IRS tax relief program is best suited for a taxpayer with a tax debt that they cannot afford to pay. Tax relief programs include the Offer-in-Compromise, non-collectible status, and the installment agreement or payment plan.
Tax debt forgiveness refers to the IRS’s policy of forgiving tax debt after 10 years, under certain conditions. It is important to consider the possible tax consequences of forgiven debts and the circumstances that might extend the collection period.
For example, if a tax liability is recent and the statute has many years remaining, then an Offer-in-Compromise is often a good idea. The Offer resolves the debt immediately and the taxpayer will not have to worry about the tax for years to come.
Alternatively, if a tax was assessed years ago and the 10-year statute of limitations is about to expire, being deemed non-collectable is often advisable. Non-collectible status is the only IRS tax relief program that does not extend the statute of limitations. This means that it is possible for the statute of limitations to expire and the tax to become unenforceable while a taxpayer is deemed to be non-collectible.
CPA Pointer #2: The IRS uses the 10-year statute of limitations to determine whether or not an Offer-in-Compromise will be accepted. The IRS will allow an Offer only if the taxpayer is unable to pay the full amount of the tax in the time that is remaining on the 10-year statute of limitations.
IRS Transcripts and the 10-Year Statute of Limitations on Taxes
Calculation of the statute of limitations requires a careful analysis of IRS transcripts. IRS generally has defined timeframes for auditing tax returns and collecting debts, and these procedures are crucial for taxpayers to understand their obligations. Transcripts are the IRS records that summarize the tax history of the taxpayer. Therefore, the first step to take when negotiating a tax debt with the IRS is to review IRS transcripts in careful detail.
IRS transcripts contain a wealth of critical information, including:
- The date a tax was assessed, starting the 10-year statute of limitations
- Events that occurred which will extend the statute, giving the IRS more time to collect the tax
- The expiration date of the 10-year statute of limitations, at which point the tax will expire. This is called the collection statute expiration date, or “CSED.”
- Missing tax returns, which will need to be prepared and filed in order to negotiate a deal with the IRS
- Substitute for returns which the taxpayer may want to challenge to reduce the liability
How to Find Out Your IRS CSED (Collection Statute Expiration Date)
The IRS recently opened a tax portal on its website for taxpayers to:
- Find out how much they owe
- Look at their payment history
- See prior year adjusted gross income (AGI)
- View other tax records, including including transcripts of past tax returns, tax account information, wage and income statements, and verification of non-filing letters
The transcripts will indicate the taxpayer’s Collection Statute Expiration Date, or CSED.
We do find, however, that IRS transcripts, filled with codes and acronyms, are notoriously difficult to read and interpret. Plus, IRS transcripts are prone to errors or miscalculations. For this reason, we suggest working with a CPA firm that is trained to read and interpret IRS transcripts. This applies to computing the 10-year IRS statute of limitations expiration date, as well as negotiating any kind of tax matter.
Collection Due Process Hearing
A collection due process hearing is a formal hearing where a taxpayer can dispute the IRS’s collection actions. During this hearing, the taxpayer can present evidence and arguments to support their position, and the IRS must provide evidence to support its collection actions. If the taxpayer prevails, the IRS may be required to withdraw its collection actions or take other corrective action. A collection due process hearing can be an effective way for taxpayers to resolve disputes with the IRS and avoid further collection actions.
3-Year Statute of Limitations
In addition to the 10-year statute of limitations, there is also a 3-year statute of limitations for audits. This is called the Assessment Statute Expiration Date (ASED).
The IRS has three years to audit a taxpayer. This three year period begins on the due date of the return (April 15 for a Form 1040). If the return is on extension, the three year period begins on the extended due date of the return (October 15 for a Form 1040).
For example, if you did not file an extension for your 2022 tax return, the IRS has until April 15, 2026 to audit your return.
It does not matter if you file your tax return early. The 3-year statute of limitation begins on the tax return due date, or the extended due date if an extension was requested.
If you file your tax return late, then the 3-year statute of limitations begins from the date you filed your return. For example, if you file your 2022 return on November 1, 2023, then the IRS has until November 1, 2026 to audit your tax return.
6-Year Statute of Limitations
If a substantial amount of income is left off a tax return, the 3-year statute of limitations for tax audits is extended to six years.
The 6-year statute of limitations for tax audits applies in the following cases:
- A taxpayer omits 25% or more of their income. This is called a “substantial omission.”
- A taxpayer fails to disclose foreign financial assets for which related income is more than $5,000
In other words, the more money you leave off your income tax return, the longer the IRS has to audit you.
Tax Fraud and the Statute of Limitations
If a taxpayer files a fraudulent tax return, the statute of limitations on IRS audits may be extended indefinitely.
Tax fraud is also called tax evasion. It refers to an intentional violation of the tax rules. To qualify as tax fraud or tax evasion, the taxpayer must have known that he or she had a duty to file a return and pay taxes. Fraud is not the same as negligence. Rather, fraud is an action motivated by a desire to evade a tax. It is an intentional wrongdoing.
In other words, if you commit fraud on a return, the IRS can audit that return forever.
Check out our Guide to IRS Tax Penalties for additional information on tax fraud.
I Did Not File My Tax Return
If you did not file your tax return, then there is no statute of limitations for the IRS to assess a tax.
It is just like a fraudulent return. The IRS can go after you forever for that year.
However, as a practical matter, the IRS will require only 6 years of returns to be filed in situations where return have not been filed for many years.
Bankruptcy and Tax Debt
Bankruptcy can have a significant impact on tax debt. If a taxpayer files for bankruptcy, the statute of limitations is suspended during the bankruptcy proceedings and for six months after the proceedings are completed. Additionally, some tax debts may be dischargeable in bankruptcy, meaning that the taxpayer is no longer liable for the debt. However, not all tax debts are dischargeable, and the taxpayer may still be liable for certain debts even after bankruptcy. It’s essential for taxpayers to understand the implications of bankruptcy on their tax debt and to seek professional advice before filing for bankruptcy.
Be sure to check with a bankruptcy attorney if your plan for tax debt forgiveness includes filing bankruptcy.
3-Year Statute of Limitations for Refund Claims
If you determine that the IRS owes you a tax refund, you generally have three years to file a refund claim. After the expiration of the three year period, the IRS will not give you a refund. Therefore, it is important not to procrastinate in cases where a refund is expected.
The refund statute expiration date is called the RSED.
The timeline for the statute of limitations for refunds begins on the due date of the return.
Amending Tax Returns
Tax returns may be amended by a taxpayer up until three years following the original filing date of a return. An amended return offers the opportunity to proactively fix an error or correct other tax problems.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.
We have significant experience determining the statute of limitations for taxpayers wishing to negotiate tax debts with the IRS.
Feel free to reach out to us by email at gary.massey@masseyandcompanyCPA.com. Or by telephone at 678-235-5460.
