The IRS, like any creditor, is bound by time limits when it comes to collecting outstanding debts. This time limit is known as the statute of limitations. But what happens when this deadline passes? Can the IRS still come after you for unpaid taxes? Here’s a short explanation from a tax attorney to help answer these questions.
Can the IRS Collect Taxes After the Statute of Limitations Expires? Answers from a Tax Attorney
The Basics
The IRS generally has ten years from the date your tax was assessed to collect the debt. This period is called the Collection Statute Expiration Date (CSED). It’s important to note that each tax assessment has its own CSED. For example, if you owe taxes from 2010 and 2012, each year will have a different deadline. Once this period expires, the IRS is legally barred from pursuing collection activities. However, it’s important to note that the ten-year rule applies to collection, not assessment. The IRS has three years from the date you filed your return to assess additional taxes.
Exceptions to the 10-Year Rule
Suspension of the CSED
The CSED can be suspended for various reasons, such as if you file for bankruptcy, are out of the country, or agree to an installment plan. These suspensions pause the clock, meaning the IRS cannot collect during these periods, but the time left on the CSED resumes once the suspension ends.
Substitute for Return (SFR) Assessments
If the IRS files an SFR because you didn’t file a tax return, the collection period might be extended. This allows the IRS more time to collect on taxes that were not reported on a timely filed return.
Fraudulent Returns
If you filed a fraudulent return, there is no Collection Statute Expiration Date. The IRS considers fraudulent returns a serious offense, and they have an unlimited time frame to pursue collection of the taxes due.
Consequences of Unpaid Taxes Beyond the CSED
Even after the Collection Statute Expiration Date (CSED) has passed, unpaid taxes don’t vanish, and their presence can still have lingering effects. The IRS retains the right to offset future tax refunds, applying them to the outstanding debt, potentially delaying your expected refund or reducing it significantly.
They can also file a Notice of Federal Tax Lien, a public record that alerts creditors to your tax debt, potentially impacting your ability to obtain loans, credit, or even employment. This lien can attach to your property, including real estate and personal assets, making it difficult to sell or refinance them until the debt is resolved.
What to Do if the IRS Tries to Collect After the CSED Expires
If the IRS tries to collect a debt after the Collection Statute Expiration Date (CSED), you should take immediate action to protect your rights. Begin by requesting a transcript of your account, a detailed record that outlines all transactions related to your tax debt, including the crucial assessment date and CSED. This transcript serves as official documentation of your tax history and can be used as evidence if you need to dispute the IRS’s claims. If the transcript confirms the CSED has indeed expired, formally notify the IRS in writing about this discrepancy, citing the relevant dates and legal provisions.
Strategies for Dealing with Expired CSEDs
Negotiate with the IRS
Even after the CSED has expired, you may be able to negotiate with the IRS for a reduced payment or a settlement. This can be especially beneficial if you have financial hardships, as the IRS may be willing to accept a smaller amount to resolve the debt.
Consider an Offer in Compromise (OIC)
An OIC is an agreement between the taxpayer and the IRS to settle a tax debt for less than the full amount owed. While the CSED expiration doesn’t guarantee acceptance, it can be a factor in your favor as you argue that collecting the full amount is no longer feasible or fair.
Request a Due Process Hearing
If the IRS doesn’t acknowledge the expired CSED, you can request a hearing with the IRS Office of Appeals. This can provide an opportunity to present your case and potentially resolve the issue, as an independent office may be more willing to consider the validity of the expired CSED.
Mistakes to Avoid
Ignoring IRS Notices
Ignoring notices from the IRS won’t make the issue go away. It’s important to respond to any communication and assert your rights regarding the expired CSED, as your silence may be interpreted as acquiescence to their claims.
Making Payments
Making even a small payment on an expired CSED can inadvertently restart the clock and give the IRS another ten years to collect. Always consult with a tax professional before making any payments, as they can advise you on the best course of action to avoid reviving the debt.
Assuming the IRS Is Correct
Don’t automatically assume the IRS is right. Always verify the information on your tax transcript and ensure the CSED has indeed expired, as errors can occur, and you have the right to challenge any discrepancies.
Hypothetical Scenarios
Scenario 1: A Successful Appeal
John receives a notice from the IRS demanding payment for taxes from 2011. After requesting a transcript, he discovers that the CSED expired two years prior. He immediately contacts the IRS and informs them of the expired CSED. However, the IRS continues collection efforts, claiming a suspension of the CSED due to a prior bankruptcy filing.
John, with the help of a tax attorney, files an appeal and provides evidence that the bankruptcy discharge occurred more than ten years ago, rendering the CSED valid. The IRS Office of Appeals agrees with John’s position and ceases collection activity.
Scenario 2: An Offer in Compromise
Sarah owed a significant amount of back taxes from several years ago. While most of her debts were beyond the CSED, a few remained active. She decides to submit an Offer in Compromise (OIC) to settle her entire tax liability.
In her OIC, Sarah highlights the expired CSEDs and her financial hardship. While the IRS doesn’t immediately accept her initial offer, they do counter with a higher amount, which Sarah ultimately agrees to. By leveraging the expired CSEDs and negotiating with the IRS, Sarah is able to resolve her tax debts for a fraction of the original amount.
The Importance of Professional Guidance
The statute of limitations for tax collection is a safeguard for taxpayers, but it’s not always a straightforward issue. The IRS can sometimes collect taxes even after the CSED has expired, especially if there are suspensions or other factors at play. It’s a good idea to seek professional guidance from a tax attorney or enrolled agent who specializes in IRS collections. They can assess your situation, advise you on a strategy, and represent your interests before the IRS.
Key Takeaway
If you receive a notice from the IRS for a debt that seems outdated, don’t panic. Request a transcript of your account to verify the CSED, and consult with a tax professional. The key is to be proactive, informed, and assertive.
If you need advice or help with a tax issue related to the statute of limitations or something else, contact Silver Tax Group (serving nation-wide, including Austin, TX), for professional help. We are familiar with the complexities of tax collection and will work to help you protect your financial future.
