IRS Collection Statute: A Key Consideration for Every Taxpayer

Summary

The IRS has 10 years to collect unpaid taxes, which is called the Collection Statute Expiration Date (CSED). The CSED is triggered when the IRS assesses taxes or a tax return is filed. Certain events, like filing for bankruptcy or applying for an Offer in Compromise (OIC), can toll the CSED, pausing the IRS’s collection efforts and extending the collection timeframe.

While waiting for the CSED to expire, taxpayers can manage their debt through a Partial Payment Installment Agreement (PPIA) or by applying for Currently Not Collectible (CNC) status. Both options have benefits and risks, and taxpayers should consider seeking professional advice.

Why the IRS Collection Statute Matters for Taxpayers

While taxes are expected to be paid in full by April 15th, you may experience circumstances that prevent you from paying on time. The IRS is tasked with collecting those taxes, but they don’t have unlimited time the do it. The agency is bound by a Collection Statute Expiration Date (CSED).

That means that there’s a statute of limitations or a limited window, that they are able to collect your unpaid taxes. After the CSED passes, the IRS is legally barred from continuing collections activities. Knowing that there is a collection timeframe can give you peace of mind, especially if you are facing financial hardship, and in some cases, you may be able to leverage this deadline to your advantage.

At the Timothy S. Hart Law Group, P.C., we work closely with taxpayers to help them solve their tax problems in sustainable ways that help them stay on track in the future. If you have tax debt, contact us for help today.

What Is the IRS 10-Year Statute of Limitations?

The Collection Statute Expiration Date (CSED) is the cutoff date that the IRS has to collect past due taxes from you. The IRS will generally have 10 years to collect on the tax amount that you owe.

For example, an unpaid amount that is owed when you file your tax return on April 15, 2024, can be in IRS collections until the same date in 2034. If you never filed a return and the IRS sends an assessment of taxes, the statute of limitations time clock starts from the date that the assessment becomes final.

If you have more than one tax assessment, each may have its own CSED.

For example, if you file an amended return that increases your tax liability, that part of the tax bill with have a different CSED than the tax debt associated with your original return. Similarly, if the IRS files a substitute return for you or if there is an audit or civil penalty assessment, those too would have their own CSED.

When Does the Collection Period Start?

It is important to note that the CSED is triggered only when the IRS assesses taxes or when the tax return is filed. Only then is the countdown initiated. Note that if you file a tax return early, the clock starts on the return due date.

The CSED clock begins when the IRS assesses your taxes. This typically happens when you file your tax return or if you fail to file when the IRS issues a Substitute for Return (SFR) based on their own calculations. The IRS will then generally have 10 years to attempt collection of the taxes you were unable to pay.

Factors That Can Delay or Extend the Statute of Limitations

Certain events such as filing for bankruptcy, requesting a payment plan, or applying for an Offer in Compromise (OIC), can toll the CSED. This means that the IRS’s collection efforts are temporarily suspended, but they get that extra time added to the end of the collection time frame, thus extending the time they have to collect.

Why does this happen? This setup is meant to protect you and the IRS. While you are waiting for a decision on your request for tax relief, the IRS will not move forward with any collection actions such as garnishing your wages. However, to protect the IRS, they get that extra collection time at the end of the 10 years.

Filing for Bankruptcy

If you file for bankruptcy, the IRS is not able to collect unpaid taxes during the time it takes to determine your bankruptcy status plus an additional six months after the determination. Effectively, the length of the bankruptcy case plus six months is added to the original CSED date.

Applying for an Offer in Compromise

On Offer in Compromise (OIC) allows taxpayers to settle their outstanding tax debt with the IRS for a reduced amount, based on their ability to pay, income, assets, and overall financial situation. An OIC is a great option if you can demonstrate that paying your full tax liability would cause undue financial hardship and you have limited assets or income. It may also be worth considering if your tax debt exceeds your ability to pay or if your financial situation is unlikely to improve in the foreseeable future.

Applying for an Installment Agreement

The clock will pause when you submit your application until the IRS approves your payment agreement. If the IRS rejects your request for payments, the clock will stay paused for an additional 30 days. Note that if you default on an agreement, the IRS will also stop the collection period for 30 days.

Requesting a Collection Due Process Hearing

You can request a hearing in many situations, such as when the IRS proposes to garnish your wages. When you request a CDP hearing, the IRS also stops the collections time clock until you withdraw your request or the CDP decision becomes final, which includes the appeals process. If there are fewer than 90 days when the clock starts again, the agency can add an additional 90 days to the collection period.

Filing an Innocent Spouse Claim

The spouse who requests innocent spouse relief will have their collection period tolled from the date they file until there is a resolution on their case. If the IRS denies their request, the clock continues to stay paused for 90 days to give the taxpayer time to petition the courts, and if they petition, it continues to stay paused until the Tax Court issues a decision. If the Tax Court is petitioned, the IRS gets an additional 60 days.

There are other factors that may add time to the CSED, including combat zone service and foreign residency. There may be a situation where multiple tolling events occur at the same time. The extension that the IRS may have would only follow the longest toll, not adding both suspensions together for a longer window.

Strategies to Manage Debt Until the Collection Statute Expires

The IRS cannot collect after the CSED, but how do you keep them at bay until that time? If you can afford to make monthly payments that pay off the tax debt by the expiration date, the IRS will expect you to do so. If you cannot, you may want to explore these options.

A Partial Payment Installment Agreement

The IRS allows taxpayers who cannot pay their tax debt in full before the CSED to enter into a Partial Payment Installment Agreement (PPIA). You make monthly payments, and then, the remaining debt expires on the CSED so you don’t have to pay it.

To qualify, you must provide detailed financial information to the IRS to determine your ability to pay. You will complete a Collection Information Statement, and then the IRS will look into real property that you own, including real property records, Department of Motor Vehicle records, and personal property that you have. In addition to looking at the things that you own from those sources, a full credit report will be run.

Applying for the PPIA suspends your CSED until a decision is made. If your PPIA application is rejected, the collection period resumes and the IRS can pursue collections once again.

If you are approved for a payment plan, you’ll pay the amount agreed upon in the PPIA every month and must ensure that you follow all tax filing instructions. If you miss your payment or default in any way, the IRS can then escalate their means of collecting on the debt.

Having a PPIA ensures that you’ll have manageable payments until you reach the end of your CSED. Your balance is effectively waived because the IRS cannot collect your unpaid taxes after that date.

Currently Not Collectible

If you’re unable to pay your taxes because of your financial situation, you may be able to suspend collection activity without stopping the CSED clock. CNC status is a temporary relief measure that allows the IRS to suspend active collection efforts without requiring you to make payments on your outstanding tax debt.

Essentially, it gives you a break from IRS collections, including levies and garnishments, while the IRS acknowledges that you cannot currently afford to pay. And if the collection period expires while you are on CNC status, you will not have to repay the debt.

To qualify for CNC status, you must demonstrate to the IRS that you are facing severe financial hardship. This typically means that you do not have enough income to cover your basic living expenses (such as food, housing, utilities, and medical costs) and your tax liability. The IRS will review your financial situation based on a detailed Collection Information Statement (Form 433-F), which includes information about your income, expenses, and assets.

It’s important to note that while your account is in CNC status, interest and penalties will continue to accrue, and the IRS will send you annual reminders of your outstanding debt. You’ll have your finances reviewed periodically to see if your ability to pay has changed. If you are due any refunds on any future taxes, the IRS may keep them and apply them to your debt. But again, once the debt expires, you will not have to repay it, which is a huge benefit of this option.

Benefits and Risks of These Approaches

Entering into a PPIA or being in a CNC status does not erase tax liability, but both are ways to stop the IRS from coming after you. And if you stay on these programs until the CSED, you will not have to repay your tax debt.

However, there are a few drawbacks to these programs including the following:

• Interest and penalties continue to accrue on your account.
• The IRS reviews your financial situation periodically and may require payment in full if your finances improve.
• You may lose your tax refunds—if you can demonstrate financial hardship, you may be able to keep a portion of your refund.

If you think the cons outweigh the advantages of these options, consider looking into an offer in compromise. The downside of an offer is that you have to make a lump sum payment, but the upside is that once you pay, the IRS won’t take back the offer if your finances improve. However, the agency can rescind the offer if you don’t file or pay taxes due during the next five years.

Risks of Waiting Out the IRS

While the CSED offers a clear end date to IRS collections, waiting for it to expire without addressing the debt might not be the best strategy for several reasons:

Although the IRS will stop its collection activities once the CSED expires, interest and penalties continue to add up on your unpaid tax balance throughout the collection period. This means that waiting for the CSED to expire without resolving your debt can lead to a larger debt burden over time.

As the CSED approaches, the IRS may ramp up its efforts to collect. This could include accelerating collection tactics such as garnishing wages or levying bank accounts.

How to Verify Your IRS Collection Statute Expiration Date

The IRS maintains a database of taxpayers’ CSED based on specific tax periods. The IRS tracks changes to your account, such as a CNC status or OIC that has been submitted. Your account is coded with these events and the CSED is calculated.

You are able to obtain your Account Transcripts through the IRS online portal or by completing Form 4506-T, Request for Transcript of Tax Return. The earliest CSED will display on the account transcript.

You may also contact the IRS by calling the toll-free line at 800-829-1040, and requesting the IRS provide an explanation of how a particular CSED is computed when there are questions concerning the accuracy of the CSED shown on an account transcript. Unfortunately, the IRS makes a lot of mistakes with CSED calculations.

If you are at all unsure of what to do next or have a complex case, working with a tax expert can ensure CSED accuracy. To get help now, contact us at the Timothy S. Hart Law Group today.

Frequently Asked Questions (FAQs)

What is the 10-Year Collection Statute, and why is it important?

The CSED is the last date that the IRS can attempt to collect taxes that you owe. It provides a clear, legally defined time limit for the IRS to collect on your tax liability and ensures that collections actions do not indefinitely harass taxpayers.

By understanding the CSED, you can plan for your financial future, explore options to resolve your tax debt, and rest assured that there is an end to the collection process.

What if I disagree with the IRS’s calculated CSED?

The IRS usually provides a notice indicating the CSED for your tax debt. If you disagree with this date, you can request a review or appeal through the IRS’s appeals process, or seek assistance from a tax professional.

Can the IRS collect after the 10-year statute expires?

While the expiration of the CSED means that the IRS can no longer collect on your tax debt, it does not automatically clear your credit report. Tax liens, unpaid debts, or collections related to your tax liability can remain on your credit report for several years

How does an OIC or CNC status affect my CSED?

Submitting an OIC will pause the clock on the CSED. If rejected, the amount of time it takes to make a decision is added to the original CSED. Being on CNC status does not pause the CSED and the IRS halts its collection actions, such as levies, garnishments, or liens, for as long as you remain in this status.

Does the 10-year period begin if I haven’t filed a tax return?

No, the clock doesn’t start until you file. However, if the IRS files a Substitute for Return to assess taxes against you, that will start the collection time frame.

What if I can’t afford to pay and I’m close to the CSED?

If you’re close to the CSED, you may be able to wait out the IRS, but you should be aware of the risk of escalating collection activities at this point. If you have financial trouble, getting on CNC status can help you get to the deadline without worrying about collections.

Get Help From a Tax Attorney Today

At the Timothy S. Hart Law Group, we are driven to help taxpayers get the best results possible when they are dealing with tax debt. Our firm is owned by a tax attorney who is also a CPA, helping to ensure that every angle is covered with your case. To get help now, contact us today.