IRS Statute of Limitations and the Collection Statute Expiration Date (CSED)
The collection power of the IRS is restricted by a statute of limitations. 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. The timer starts ticking on the day that the IRS assesses the tax. Typically the tax assessment date 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 statute of limitations generally expires after 10 years. In other words, the timer stops ticking at 10 years, triggering the expiration of the tax.
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.
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 (like the running of a clock), then the IRS will have more time to collect the tax.
Put another way, tolling or freezing the statute of limitations extends the CSED. It extends the date on which the 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)
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.
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
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 IRS statute of limitations expiration date, as well as negotiating any kind of tax matter.
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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 analyzing IRS transcripts, including the statute of limitations for taxpayers wishing to negotiate tax debts with the IRS.