The statute of limitations 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. This is great news for the taxpayer who is under a mountain of tax debts. The end is always in sight.
The Basics
The statute of limitations works like a timer set for 10 years. The timer starts ticking on the day that the IRS assesses the tax. Typically this is within a few days of when the return is received by the government.
Alternatively, 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.”
The timer stops ticking at 10 years, triggering the expiration of the tax.
Extending the Statute
It is generally in the taxpayer’s best interest for the 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, then the IRS will have more time to collect the tax.
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)
- Requesting an installment agreement (the statute is extended for the amount of time that the installment agreement is pending)
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, giving the IRS more time to collect the tax.
Tax Relief Programs and the Statute of Limitations
The time remaining on the 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.
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 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 Statute of Limitations
Calculation of the statute of limitations requires a careful analysis of IRS transcripts. 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
Taxpayers may obtain copies of their transcripts from the IRS. However, CPA firms can often obtain transcripts faster. And CPAs trained in IRS negotiation matters will be best equipped to interpret IRS transcripts which are frequently confusing to most people due to the many codes and acronyms used by the IRS. This is particularly true when it comes to computing the statute of limitations. We have information about cash sales and the IRS if you want to read more!
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Massey and Company CPA is a boutique accounting firm serving individuals and small businesses in Georgia, Illinois and throughout the country. Our services include tax preparation and planning for businesses and individuals, IRS tax problem resolution, IRS audits, and small business accounting and bookkeeping. We have significant experience analyzing IRS transcripts, including the statute of limitations for taxpayers wishing to negotiate tax debts with the IRS.
