I’ve recently advised clients about whether the government can still collect old tax liabilities. This issue can be very technical and often depends on dates and information not in the taxpayer’s records, so I recommend having legal counsel make determinations about how long tax will be collectible as part of a larger strategy. With that said, this article provides basic information about how the law works relating to the questions I hear most frequently.
First, here are a couple of quick and easy answers:
- If you owe the Oregon Department of Revenue, there is no statute of limitation. That’s right, Oregon can come after you forever. When you die, they can collect from your estate. It’s not nice, but it’s simple.
- If tax has not been assessed, either by filing a return or the IRS filing a substitute for you, no statute of limitation has started running, so the IRS will also have forever. [I say that referring to the laws limiting the authority of the IRS. As a practical matter, the IRS has internal guidelines about how far back they will go. It may not be as bad as you think. You should seek counsel if there are old years for which you didn’t file and you need to come into compliance.]
With that out of the way, we can turn to the more complex issues in this area.
The general rule is that the IRS has ten years from the date of assessment to collect the tax due, but many events can extend that time. We’ll look at these different pieces.
Assessment
Assessment is the official, formal recording of tax by the U.S. Treasury. This is typically done electronically now, but in some cases will still be done on paper.
You Filed a Return
The most common assessments are those following voluntarily filed tax returns. The IRS is allowed to assess the tax you report on your return without jumping through any hoops and they’re only allowed to do it within three years of when the return is filed. The return is usually considered filed when received, but there are exceptions. For example, if you file the return early, it is treated as filed on the due date. If three years for them to do the paperwork sounds like a long time, don’t worry, they usually assess very quickly because until they assess the tax, they can’t take any collection action. So even if they did wait a long time to make the assessment, they would still have only ten years to collect; that period would merely start from a later date and they wouldn’t bother you until then.
You Filed a Return but the IRS Wanted More
If you file a return and the IRS makes changes, there can be additional assessments. The procedures vary depending on the type of changes, but this category includes audits (or “examinations” as the IRS calls them). They will notify you of the deficiency they determine and give you an opportunity to dispute it. After your opportunities to dispute the tax have passed or failed, they can assess the tax and begin collection. This assessment will be separate from the initial assessment based on the return you filed. It will have its own date and its own ten year period for the IRS to collect it.
You Didn’t File a Return, so the IRS Filed for You
Just as the IRS can make an assessment of tax through deficiency procedures when you file an erroneous return, they can assess tax through deficiency procedures if you don’t file at all. If you don’t file a return the IRS may prepare a substitute for return. This is usually the worst result. The IRS will not make any elections for you or claim any credits for you. As I noted above, this can legally happen at any time if you don’t file a return. You would need to check the IRS records to determine when the assessment was made to know when the ten year clock starts running.
Collection Statute Expiration Date (CSED)
The statute of limitation on collection gives the IRS ten years to collect tax from the time it is assessed. The date on which the ten year period expires is called the CSED. After assessment and before the CSED the IRS may levy or begin a court proceeding. The levy is the administrative collection tool given to the IRS that allows it to take property without a court proceeding. The IRS may levy wages, bank accounts, and other property. If the IRS does not collect the tax by levy, it may resort to using the courts. As federal court cases often last for many years, the statute requires only that the proceeding begin within before the CSED. The consequences may extend for several decades.
Events that Extend the CSED
Many administrative requests prevent the IRS from collecting tax. Some ill-advised taxpayers will make these requests purely to delay paying the tax. This is usually an ineffective strategy. During the time the IRS is prohibited from collecting, the CSED is extended. Moreover, some events give the IRS extra time to recover. Making these requests purely to create a delay may also have serious consequences beyond the scope of this article. The most common events that extend the CSED are below.
Collection Due Process (CDP). CDP is an important taxpayer right and having a CDP hearing often resolves collection cases. It prevents the IRS from improperly taking collection action and does not allow collection while the request is pending. I’m typically seeing the IRS backlogged about six months between a CDP request and the hearing. The CSED is extended for that entire time. If CDP is necessary to preserve a taxpayer’s rights, that’s a small tradeoff, but if there is another way to achieve the same outcome, that may be preferable in some cases.
Offer In Compromise (OIC). OIC’s are appealing to taxpayers, but not as easy as advertisers would indicate and the IRS backlog is six months on these as well. The CSED is extended the entire time the OIC is pending and for another 30 days after rejection. See my earlier posts about the OIC process and compliance requirements before committing to extending the CSED for so long.
Installment Agreement (IA). The time during which an IA is pending extends the CSED. Once the IA is approved, the clock starts running again. Fortunately, this processing time is usually short and IA’s often resolve the liabilities, rendering the CSED irrelevant.
Innocent Spouse Relief. While a request for relief is pending or on appeal, the government is prevented from taking collection action against the requesting spouse. The non-requesting spouse, whose liability can not decrease in this proceeding, is not protected from collection and consequently sees no change to the CSED. Because of the three types of innocent spouse relief and complex possibilities of appeals in these cases, I won’t go into the details, but understand that while the IRS is restricted from collection, the requesting spouse’s CSED is extended. These cases may take years to resolve and the requesting spouse often experiences dramatic financial changes during that time, so extending the CSED for so long can be an important consideration.
Bankruptcy. Bankruptcy may resolve the debt and render the CSED moot, but if not, the IRS will have much longer to collect. When a debtor files a bankruptcy petition, the IRS is prohibited from collection. At the end of the case, when the stay is lifted and the IRS can collect again, the CSED is extended for the time of the stay plus six months. Many tax debts are not discharged in bankruptcy, so while the taxpayer may have a fresh start with some creditors, tax collection may just be starting. It is important to analyze whether tax debts will be discharged when considering a bankruptcy and have counsel advise you before making such a big decision that depends on many small details.
Agreeing to Extend the CSED. At first, allowing IRS to collect tax after the law would otherwise prohibit it might seem foolish, but it could be a sensible option in certain circumstances. If a taxpayer can not afford to fully pay the liability before the CSED but will experience a change in financial condition after the expiration of the CSED, an agreement to partially pay now and pay the rest later could be better than risking court proceedings before the CSED.
Court proceedings
Like other creditors, the government can take action through the courts. When the special administrative actions given to the IRS are inadequate to collect the debt, the government may resort to these costlier methods. Specifically, if the CSED will expire before the IRS can collect from a taxpayer who has or likely will have significant assets, the government can reduce the assessment to judgment. This creates a court judgment against the debtor and gives the government new collection powers. Although this has several consequences, we’ll stay focused on the CSED and not stray into the expansive Federal Debt Collection Procedures Act. The IRS maintains that once the judgment is obtained, the CSED is extended INDEFINITELY and they can levy until the debt is satisfied.
Conclusions
The ten-year statute of limitation on collection is important to manage carefully. Filing a return to get the clock started is essential. Many common taxpayer approaches to resolution result in extending the statute and should be evaluated with respect to the CSED and larger strategy. Finally, taxpayers should not assume they’ll be clear at the CSED because it is possible for the government to begin a court proceeding before the CSED and continue collection for decades. Rather, taxpayers should seek experienced counsel to plan strategies for their unique situations.