Business owners and individuals with back taxes find themselves overwhelmed by the fear of endless collection actions, struggling to escape the constant pressure. Understanding the laws surrounding the IRS’s ability to collect taxes is necessary for forming a strategy for dealing with tax debts. Is there a statute of limitations on taxes?
The IRS does impose a statute of limitations on tax collections. However, the rules can vary depending on different factors, including the nature of the tax debt, the actions taken by the taxpayer, and the specific circumstances surrounding the case.
In this comprehensive article, we will go over the statute of limitations on IRS collections and how it works. Here is everything you need to know.
What Is the Statute of Limitations?
The statute of limitations is essentially a time limit for legal actions. It defines the maximum amount of time the IRS can take action to collect a tax debt.
Once the statute of limitations expires, the IRS loses the legal right to collect the debt through enforced measures such as liens, levies, or wage garnishments. Nevertheless, the IRS has the power to extend or pause this statute for various reasons. This means tax debts could last far longer than initially expected.
The Basic Statute of Limitations for IRS Collections
In general, the IRS has ten years to collect back taxes from the date the tax was assessed. This 10-year period is known as the “collection statute expiration date” (CSED).
It starts from the date the IRS officially determines the amount of tax owed. It happens when a tax return is filed and accepted or when the IRS issues an assessment based on an audit.
Once the 10-year statute expires, the IRS can no longer pursue collection actions unless the taxpayer agrees to an extension or certain actions occur to pause the clock. The 10-year period is set in law, and it is the IRS’s default rule.
Can the Statute of Limitations Be Paused or Extended?
While the IRS is limited by the statute of limitations, certain factors can extend or pause the countdown. There are several common scenarios where the statute is paused or extended:
Filing for Bankruptcy
When an individual or business files for bankruptcy, the statute of limitations on IRS collections may be paused while the bankruptcy case is active. Bankruptcy law can delay or stop IRS collections until the case is resolved.
However, not all tax debts are dischargeable in bankruptcy. For this reason, the outcome depends on the type of tax debt involved and whether it meets the criteria for discharge.
The Taxpayer Leaves the U.S.
If a taxpayer leaves the U.S. for an extended period of time (more than six months), the statute of limitations on collection is paused during the time the taxpayer is outside the country. The IRS will resume its collection efforts once the taxpayer returns to the U.S.
The IRS Suspends Collection
The IRS can pause the statute of limitations on collections if a taxpayer is in a situation where they are considered “currently not collectible.” This can happen when a taxpayer is financially unable to pay the debt.
In these cases, the IRS may suspend active collections. However, the statute of limitations is not reset; it is only paused until the taxpayer’s financial situation improves.
Fraud or Willful Evasion
If the IRS determines that a taxpayer has committed fraud or attempted to evade paying taxes, the statute of limitations can be extended indefinitely.
This means the IRS can pursue collections at any time, even after the 10-year period has passed. It can be as long as the taxpayer’s actions indicate an attempt to avoid paying taxes.
Agreements with the IRS
Taxpayers may enter into agreements with the IRS to extend the statute of limitations. For example, entering into an IRS payment plan or settling debts through an Offer in Compromise could result in the IRS pausing the statute.
If you negotiate a deal with the IRS to pay your tax liability in installments, you might agree to extend the statute beyond the usual 10 years.
Taxpayer Requests an Offer in Compromise
An Offer in Compromise (OIC) is a settlement agreement where the taxpayer agrees to pay less than the total amount owed. When a taxpayer applies for an OIC, the statute of limitations on collections is paused while the IRS evaluates the offer.
If the offer is rejected, the statute resumes, and the taxpayer remains responsible for the original debt. In some cases, the IRS will allow more time for taxpayers to settle their debt if their financial situation improves.
Collection Due Process Hearings
If a taxpayer requests a Collection Due Process (CDP) hearing, the statute of limitations on collections is paused during the review process.
These hearings are often requested when the IRS issues a levy or lien and the taxpayer wants to dispute the action. As long as the CDP hearing is pending, the IRS cannot take further collection actions.
What Happens After the Statute of Limitations Expires?
Once the statute of limitations on IRS collections expires, the IRS can no longer pursue legal actions to collect the debt. This means they can no longer place a lien on the taxpayer’s property, levy bank accounts, or garnish wages. The tax debt is considered “uncollectible” from the IRS’s standpoint.
However, note that the expiration of the statute of limitations on collections does not mean the tax debt disappears. The taxpayer still owes the debt, and the IRS may choose to write it off internally.
The debt may also be reported on the taxpayer’s credit report for a period of time. This can still impact the taxpayer’s financial situation.
Impact of Tax Liens
Even if the statute of limitations on collections expires, a tax lien that was placed before the expiration may remain on a taxpayer’s credit report.
A lien acts as a legal claim against property that the taxpayer owns. It can continue to affect the individual’s ability to secure loans or credit. The lien remains on the taxpayer’s record for years, even after the IRS has stopped its collection efforts.
How to Handle IRS Tax Debt Before the Statute Expires
For taxpayers who are concerned about their ability to pay off IRS debt, there are a few options that may help prevent the full 10-year collection period from coming into play:
Set Up a Payment Plan
If you’re unable to pay your full tax liability upfront, setting up a payment plan with the IRS could be a viable solution. A payment plan allows you to pay the debt in installments over time.
However, if you’re on a payment plan, the statute of limitations on collections can be extended depending on the nature of the agreement.
File an Offer in Compromise
For those who qualify, an Offer in Compromise can be a way to settle your tax debt for less than the amount owed. If you’re facing significant financial hardship, the IRS may allow you to settle your debt for a fraction of what you owe.
Keep in mind that an OIC can pause the statute of limitations while the IRS evaluates the offer.
Appeal the Debt
If you believe the IRS has made an error in its assessment, you have the right to appeal. Filing an appeal can extend the statute of limitations while the matter is under review.
Seek Professional Help
Tax professionals, including accountants and tax professionals, can offer valuable insight and guidance in dealing with IRS collections. They can assist in negotiating payment terms, submitting Offers in Compromise, or representing you during IRS audits.
Can the IRS Collect Taxes Beyond 10 Years?
The IRS generally cannot collect tax debts once the 10-year statute of limitations expires. However, there are several circumstances under which this period could be extended, paused, or reset, including taxpayer fraud, bankruptcy filings, or a request for an Offer in Compromise.
Stay on top of your tax obligations and understand the actions that can extend the collection period. Taxpayers who are facing mounting tax debt should explore options for settlement or payment before the 10-year deadline passes.
Get the Relief You Deserve – Call Us Today to Discuss Your Tax Issues
So, is there a statute of limitations on taxes? The IRS does have a statute of limitations on tax collections–typically lasting for 10 years. However, the clock can be paused or extended in various situations. This depends on the taxpayer’s actions and the specifics of their case.
At Rush Tax Resolution, we specialize in helping individuals and businesses navigate these tricky situations and find the best solutions for their tax problems. Our team can provide clear guidance on the statute’s impact on your case and work with you to stop IRS collections in their tracks.
Don’t wait until it’s too late. Call us today at 855-477-2255 for a free consultation. We’ll give you honest, upfront advice and only take your case if we’re confident we can help. Let us help you resolve your tax issues with confidence.
