Owing the IRS is most certainly stressful. It’s even more stressful when it feels like the IRS is coming after a taxpayer for what feels like ‘forever.’ Although it may feel like a lifetime, generally, the IRS only has 10 years from the date of assessment to collect on an outstanding balance due per Internal Revenue Code 6502. If a taxpayer inquiries, the IRS will provide him or her with the collection statute expiration date (CSED) for each tax period. A taxpayer can call the IRS and ask for their balances due and collection statute dates. Usually, the IRS representative can provide this information over the phone unless the collection statute is suspended.
Once the collection statute expires, a taxpayer can finally see some relief since the IRS can no longer collect on the balance due unless the IRS chooses to reduce the debt to a judgment which they rarely do in practice. As a result, the IRS will ordinarily write-off the uncollectable balance due on debt where the CSED has run.
It’s prudent to understand that taxpayers need to be aware of the collection expiration dates and certain events that can extend the 10-year collection period. If a statute is due to expire, then taking action that would further extend the statute only gives the IRS more time to come after a taxpayer. Thus, making sure a taxpayer does not extend the CSED is an important strategic step during any IRS resolution process or case. Some examples of events that can suspend or extend the collection statute and give the IRS more time to collect are as follows:
- Bankruptcy: When a taxpayer files for bankruptcy, the IRS is prevented from collecting against the taxpayer, as are all other creditors. Since the IRS cannot collect on the outstanding taxes due from the taxpayer during a pending bankruptcy, the IRS suspends the CSED during the bankruptcy and for six months thereafter.
- Offer in Compromise: A taxpayer who does not have the ability to pay the IRS tax debt in full may qualify for an offer in compromise. The taxpayer must submit current financial information (bank statements, proof of income and expenses, equity and assets) to support their financial position. While the IRS reviews the financial information of the taxpayer, the IRS places a collection hold on the account. The IRS cannot levy the taxpayer, so the IRS suspends the CSED until 30 days after the offer in compromise is rejected, or if a timely appeal protest is filed, after the appeal is rejected.
- Collection Due Process Hearing: A taxpayer has the constitutional right to request a hearing prior to a proposed levy. Generally, if a collection due process hearing request was made timely, the IRS cannot collect on the tax liability for the specific tax periods in Appeals. Therefore, while the IRS is waiting for the taxpayer to have their opportunity to receive a hearing, the CSED is suspended up until the date the determination from Appeals becomes final, which includes any Tax Court proceedings.
- Pending Installment Agreements: A taxpayer can request an installment agreement from the IRS by proposing a monthly amount with a due date that they would like to pay the IRS on the back taxes. Once the IRS receives such a request for a payment plan, the IRS will place the account in “pending installment agreement” status. During the time the installment agreement is pending, or while an appeal is filed and heard on a rejected proposal, or during the installment agreement termination process, the IRS cannot collect on the outstanding balances due, so the IRS will suspend the CSED.
- Partial Pay Installment Agreements with Form 900, Tax Collection Waiver: The IRS will only execute a Form 900, Tax Collection Waiver (to extend the CSED) in only certain situations in conjunction with a partial pay installment agreement. The IRS will consider securing a waiver with a partial pay installment agreement where the IRS expects the taxpayer to come into possession of an asset after the running of the CSED and to allow time for liquidation of the asset, as a best-case resolution. The CSED will not be extended for more than 6 years.
- Judgment/Litigation: If the IRS files suit for the collection of unpaid taxes, the period during which the tax can be collected by levy can be extended beyond the 10-year period. However, the levy or court proceeding must have started before the 10-year CSED runs.
- Innocent Spouse Claim: An Innocent Spouse claim is generally filed by one spouse who claims that he or she should not be held liable for the taxes due on a married filing joint tax return. Once a claim is filed, the IRS places a collection hold on the account until the IRS can review the case which can take several months. The CSED is suspended from the date the claim is filed until the earlier of (1) date a CSED waiver is filed, or (2) 90-day period expires to petition Tax Court, or (3) if a Tax Court petition is filed, when the Tax Court decision becomes final.
- Suits to reduce the assessments to Judgment: the IRS will file a suit to reduce assessments to judgment to prevent the statute of limitations for collection from expiring prior to the collection of the debt. If tax assessments are reduced to judgment; (1) the tax lien continues until the underlying tax liability is paid in full or lien becomes unenforceable (lapse of time), (2) levy action can continue until the tax is paid in full or becomes unenforceable, (3) the IRS can foreclose on a property (even a personal residence but politically unpopular) to collect from the equity under the tax lien.
- Taxpayers residing outside the United States: if a taxpayer is outside the United States for six months or more, the collection statute is suspended. The CSED does not expire until 6 months after the taxpayer returns to the United States.
- Combat Zone or Contingency Operation: If a taxpayer is in an area designated as a combat zone or a contingency operation designated by the Department of Defense, the IRS will place a “freeze on the account” for the period the taxpayer serves in the combat zone or operation plus for any continuous qualified hospitalization (limited to 5 years of hospitalization in the United States). The CSED will be suspended during combat or operation, plus an additional 180 days, but not extended during any periods of continuous qualified hospitalization because of injury received while serving in a combat zone or operation.
- Military Deferment: If a taxpayer is in the service and the collection of any tax is materially impaired due to the taxpayer’s military service, collections will be deferred up to 180 days (or 6 months). The CSED will be suspended during the taxpayer’s military service, plus an additional 270 days.
- Taxpayer Assistance: A taxpayer can request for assistance from the Taxpayer Advocate’s Office because the taxpayer is suffering or about to suffer a “significant hardship” such as a lien or levy. However, taxpayers file for taxpayer assistance when they have tried to resolve an issue through regular channels, but for whatever reason the issue cannot be resolved (i.e. CSED extended by 5 years for no reason, and nothing occurred to suspend or extend the CSED). The CSED can be suspended if the Advocate issues a Taxpayer Assistance Order which places the account on hold from collections.
It’s important to note that the IRS can get very aggressive in attempting to collect tax debt before the CSED runs out. Thus, if a taxpayer’s case is in collections, it’s important to be aware and seek the assistance of a tax attorney who can safeguard one’s income, bank accounts and assets. The IRS will seek to collect against all these sources to try and collect as much as possible within a short period of time where a CSED is about to run.
Helpful Q and A libraries:
https://klasing-associates.com/topics/tax-relief-and-resolution/
https://klasing-associates.com/topics/innocent-spouse-relief-faq/
https://klasing-associates.com/topics/liens-levys-garnishments/
https://klasing-associates.com/topics/offer-in-compromise-faq/
