The Statute of Limitations gives the IRS up to 10 years to collect a tax.
The IRS cannot chase a taxpayer forever attempting to collect a tax. It is limited to 10 years by the Collection Statute of Limitations. Once the 10-year statute expires, the tax is no longer enforceable and it simply goes away.
Starting and Tolling the IRS Collection Statute of Limitations
The 10-year period starts on the day the tax is assessed by the IRS. Typically this on, or very close to, the day on which the return is received by the IRS.
The statute of limitations also starts if the IRS creates a tax return for an uncooperative taxpayer who does not submit their own return. This is called a Substitute for Return.
Certain actions will “toll,” or freeze, the statute of limitations, preventing it from running. If the statute is not running, then the IRS will have more time to collect the tax. Events that prevent the IRS from taking collection action against a taxpayer will toll the statute. The thinking is that it would be unfair to allow the statute of limitations to run while the IRS is prevented from taking action against the taxpayer. Events that toll the statute are bankruptcy, filing an offer-in-compromise and requesting an installment agreement.
Filing a bankruptcy claim freezes the statute for the period that the taxpayer is in bankruptcy, plus an additional six months. As a result, the statute of limitations is extended and the IRS is given more time to collect the tax.
Filing a an offer-in-compromise with no chance of success is not only a waste of effort. It also tolls the statute, giving the IRS more time to pursue the taxpayer.
It is generally in the taxpayer’s best interest for the statute to continue to run, hastening the date when the tax becomes unenforceable.
Georgia CPA Pointer: Not collectible status is the only IRS tax relief program that does not stop the statute from running. This means that it is possible for the statute to expire and the tax to become unenforceable while a taxpayer is deemed to be not collectible.
Tax Relief Programs and the Statute of Limitations
The time remaining on the collection statute 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, currently not collectible status, and the installment agreement or payment plan.
For example, if a tax liability is recent and the IRS has many years to collect the tax, then an offer-in-compromise is often a good idea. The offer resolves the debt immediately and the taxpayer does not have to worry about the tax for years to come.
Alternatively, if the tax was assessed years ago and the 10-year statute of limitations has nearly expired, being deemed not collectable is often advisable. This prevents the IRS from pursuing collection activity while the statute continues to run and eventually expire. The tax will then go away.
The only way to know where a taxpayer is in the statute of limitations period is by checking the taxpayer’s IRS transcripts. Transcripts show the date a tax return is received, when a tax is assessed, the amount of penalties and interest charged, and payments received. Transcripts also show tolling events.
Our accounting firm regularly analyzes IRS transcripts to determine the Collection Statute Expiration Date (CSED). This is a critical factor when negotiating with the IRS.
If you would like to watch our video about the statute of limitations, the CSED and IRS tax relief programs, click here.
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Massey and Company CPA is a boutique accounting firm located in Atlanta, serving the needs of small businesses and individuals throughout Georgia. Our services include tax preparation, IRS tax problem resolution, IRS audits, small business accounting and bookkeeping. We also have significant experience analyzing IRS transcripts.