In our course, Dealing with IRS Tax Debt, we teach students everything they need to know to resolve their outstanding tax debt and save thousands of dollars in representation costs.  It’s also a great training tool for professionals new to IRS Representation.

Understanding how long the IRS has to collect is critical to any resolution strategy for those who owe back taxes.  In this course resource, I’ll discuss the statutory collection window and how to use it to your advantage when negotiating with the IRS.

Collection Statute of Limitations

The Collection Statute of Limitations defines the legal amount of time the Internal Revenue Service is allowed to collect tax owed to the Treasury Department.  The statute goes by several names, including the Collections Statute, Statute of Limitations, and Collection Expiration Period.  Internally, the IRS meticulously tracks this period.  It calls the last day to collect a tax due, the Collections Statute Expiration Date.  IRS employees refer to this date by the acronym CSED.  The IRS guards this date and does not openly share it with taxpayers.  To learn your exact CSED (and there can be more than one), you must request it.  Otherwise, you can use the information provided in this resource to gain a working knowledge of how the statute works and arrive at a fair estimate of when collection ends.

How Long Can the IRS Collect Tax Due?  The Collection Statute of Limitations allows the IRS ten years to collect a tax due.  The clock starts ticking on the date the tax gets assessed and ends ten years from that date.  Several events can extend the collection period and complicate estimating the statute’s expiration.  I’ll discuss the assessment date and these extending events below.

When are Taxes Assessed?  The term assessment means that the IRS has formally recorded your liability in the books.  It’s the day you formally owe the IRS the money – technically, the date an assessment officer signs what is called the summary record (which I seriously doubt happens anymore).

The date of assessment varies depending on the item.  The assessment date on Form 1040 is generally on or near the date the IRS processed the return.  It’s not the date filed.  The IRS can take days, often weeks, to record your tax liability.  There is also a separate assessment date for each year’s return.  Additional tax appearing on an amended will have a new assessment date.  If an amended return reduces tax, the assessment date on the original return stays the same.  When a change gets made due to an audit, additional tax has a new assessment date. 

The most common penalties related to Form 1040, the Late Filing and Late Payment Penalties (also called Failure to File and Failure to Pay), generally have the same assessment date as the underlying tax.  When the statute expires, collections on these penalties (and related interest) stop.  Other penalties have separate assessment dates.  These include, but are not limited to, the Estimated Tax, Failure to Deposit (employer taxes), Fraud, and Negligence penalties.

How Can You Find Your Assessment Dates?  Because each return, additional tax, and some penalties have separate assessment dates, determining the collection expiration dates for a given tax year can be daunting.  It’s also a job IRS employees are not excited to perform (assuming you’re lucky enough to reach the right person).  But, as taught in Dealing with IRS Debt, the first step to determining the day collection efforts must stop is knowing the assessment date of each item.  The easiest way to calculate your CSED is to obtain a Tax Account Transcript.  The Tax Account Transcript shows pertinent information regarding your tax and liability for a given year.  It includes return information such as the type of return filed, filing status (married, single, etc.), adjusted gross income, taxable income, and tax due.  It also includes the dates additional taxes and penalties get assessed and events extending the statute of limitations (discussed later).

There are several ways to obtain your Tax Account Transcripts.  The first is to request it by phone (800-908-9946).  The second is by using the IRS Get Transcripts by Mail portal.  These methods offer the current and three prior years’ transcripts.  A third way to obtain Tax Account Transcripts is via the IRS Get Transcript Online service.  This technique provides the current and previous nine years’ transcripts.  A final method is to submit Form 4056-T and follow the instructions.  The transcript you want is item 6(b), Account Transcript.

Events Extending the Collection Statute:  The primary factor that makes calculating the Collection Statute Expiration Date difficult are events (called Tolling Events) that extend it.  Taxpayers create most tolling events, which give the IRS more time to collect the money owed.  Think of a tolling event as a timeout in a football.  The collection clock stops during the time out.  It restarts when the timeout ends.  Here’s a brief list of tolling events and how they impact the CSED.

• Bankruptcy:  When a person who owes back taxes files for bankruptcy, the collection expiration date moves forward by the bankruptcy period plus an additional six months.
• Collection Due Process Appeal:  These occur when a taxpayer does not feel they owe the tax assessed or has a good reason as to why they should not have to pay it.  They stop the collection clock deadline for the days between the appeal filing date and the decision date.  However, the number of days the statute gets extended cannot be less than 90 days. 
• Filing an Offer in Compromise (OIC):  When a tax-debtor cannot pay all of their tax but can afford a portion, they can file an Offer in Compromise (OIC).  Although OICs are a valuable representation tool, they get hyped by representation firms as the debtor’s magic bullet.  In reality, however, they are expensive, clunky, and not approved nearly as often as firms might have you believe.  (I tend to utilize OICs as a final resort for those with large debts who meet the financial criteria.)  Filing an Offer in Compromise extends collections from the day the offer is pending (formally received) until it is accepted, returned, rejected, or withdrawn, plus an additional 30 days.  If the OIC gets denied and the filer appeals, the appeal period extends the collection expiration date.
• Installment Agreements: If you can make payments on your taxes and request an installment agreement, the time it takes to consider the request extends the ten-year collection period.  If the IRS denies the request, add 30 more days.  Appealing the denial further extends the statute.  Defaulting on an installment agreement and having one reinstated can also extend the collection period.  Note: Calling the IRS and setting up an installment arrangement, which generally happens during the call, will not automatically extend the collection period.  Defaulting on that agreement can.
• Claiming Innocent Spouse:  When married couples file their tax return together, they both sign the return.  They are jointly and separately liable for any tax due.  It does not matter which spouse’s income created the tax; the IRS can and will pursue either for payment.  If one spouse signs the return under duress or is unaware of the other’s shady financial activity, they can file for Innocent Spouse Relief.  Doing so extends the collection period from applying until relief gets approved.  If relief gets denied, the collection clock stops for an additional 90 days – when the right to petition Tax Court ends.  If the spouse petitions the Court, the decision period extends the statute another 60 days.

Calculating the Collection Statute Expiration Date is relatively easy if you have no extending events.  Determining the date when one or more of the extending events are present may require a table or spreadsheet.  Often obtaining the exact CSED is not necessary.  An approximate month and year are enough for effective planning.

Importance of the Collection Statute’s Expiration:  Those who can pay their taxes without financial hardship should pay their debts.  It’s the fair and responsible thing to do.  Don’t let others take up your slack.  If everyone paid their taxes in full, the tax rate might drop!

Those who are not so lucky should travel every relief avenue available.   As we teach in Dealing with IRS Tax Debt, the date the IRS must stop collections is vital when creating a payment strategy.  The tax, many related penalties, and associated interest effectively disappear on that date.  The clock starts ticking after you file your tax return (one of the many reasons not filing is a bad idea).   As notices get sent, the clock keeps ticking.  As payments get made, the clock keeps ticking.  Liens get filed - clock ticks.  Wages garnished, or bank account levied (we teach how to stop these)?  The CSED grows closer. 

Many who owe back taxes fear the IRS.   They do not understand that the IRS has a heart (weird to type that).  Treasury regulations demand collection efforts cannot create an undue hardship for the debtor or the debtor’s family.  A handy collection strategy utilizes the CSED and Currently Not Collectible (CNC) status.  Those legitimately struggling to pay their bills can get their accounts deemed Currently Not Collectible, suspending collection efforts.  Levies, garnishments, and most collection notices stop, although liens protecting the government’s interest remain.  The suspension period is often two years (usually longer – way longer) unless there is reason to believe the debtor’s financial situation has improved.  A similar strategy, the Partial Payment Installment Agreement, also utilizes collection expiration to the taxpayer’s advantage.  We cover both of these strategies in Dealing with IRS Tax Debt. 

Conclusion:  Owing back taxes can be scary, but knowledge eliminates fear.  Understand that IRS employees are just doing their job, a job that has both guidelines and limits.  You have nothing to fear if you are honest and not trying to defraud the government.  Our course, Dealing with IRS Tax Debt, will teach you everything you need to know to understand and resolve your outstanding tax debt.  It’s also an excellent tool for professionals new to IRS Representation.  Check it out!