The Statute of Limitations On Tax Debt Owed To The IRS BF Blog

The Statute of Limitations On Tax Debt Owed To The IRS

You have heard the old adage from Benjamin Franklin “…but in this world, nothing can be said to be certain, except death and taxes.” This was true in 1789 and it is today as well. Everyone is going to die one day, and everyone is required to pay taxes. There is a tax on our income, everything we buy, and things we own. However, it all starts with the money we earn from our income which means there is an overlapping of taxes paid based on the income we make and how we use it. Based on this income the tax bracket we fall into may require us to pay even more taxes, which could lead to the debt of taxes owed to the Internal Revenue Service.

The government will come for this money one day. How will you handle this tax debt if the amount is in the thousands? How long do you have to pay it back?  Let’s dive into the statute of limitations on tax debt owed to the IRS.

IRS Statute of Limitations

The statute of limitations on tax debt owed to the IRS is the 10-year period from the tax year.  This 10-year period begins when the IRS assesses the tax liability. This can happen when taxes are filed, or the IRS assesses tax liability, and it then becomes the assessment date start time.

This means the government has a 10-year statute of limitations to take any collection action from the date of assessment.  The collection statute of expiration date prevents the IRS from collecting funds beyond this time limit. Therefore, the tax liability will be removed from the books and the IRS officers will have to write off the debt if they miss this deadline.

The IRS has three years to audit an income tax return and three years to assess the amount of taxes owed. The IRS audited and assessed my tax return one year and determined they owed me money.  We were entitled to a larger tax refund than what I had filed. I don’t think this happens often, but it made me decide that doing my own taxes was too risky. This mathematical error triggered an audit.

The IRS has three years after taxes are filed to assess the taxes that you owe. Review the internal revenue code – IRC § 6501 for the general rule and other information.

With owning a home, investing, childcare credits, standard vs. itemized deductions, property taxes, interest, and charitable donations, I felt I did not know enough to avoid making mistakes. Besides, I was no longer doing simple tax forms and these added forms made me nervous. Hence, it was less stressful to drop off the tax forms and pay tax practitioners to do this. It also puts the onus on the tax preparer to deal with any errors and tax audits.

Audits By The IRS

The IRS agents have a three-year statute of limitation on tax audits. However, they can go back six years if they deem the taxpayer has significantly understated their taxable income. How many people does the IRS audit? Who are these taxpayers that are audited?

The IRS audits about 0.38% of Americans in 2022, down from 0.41% in 2021 per Transactional Records Access Clearinghouse (TRAC) at Syracuse University. There were approximately 164,545,167 total returns filed with 626,204 taxpayers audited in 2021.

However, based on income the odds of being audited differ quite a bit. Per AccountingToday.com, The top 5% of Americans fail to pay an estimated $307 billion in taxes every year, according to a new report from the Treasury Department, with the top 1% owing more than half of that, at $163 billion. That amounts to approximately half of the estimated tax gap of $600 billion every year, the report said.

However, The burden of the IRS audits disproportionately falls on lower-income families, with households making less than $25,000 facing the largest audit scrutiny among other income ranges in 2022, according to data released by TRAC.

This is mainly due to lower-income families claiming the Earn Income Tax Credit (EITC). Typically, higher earners would be audited more often but because of this credit being claimed in error, the audit rate remains high amongst this group of taxpayers.

Hopefully, with the increased funding to the IRS, more time will be spent addressing the $600 billion estimated tax gap between wealthier taxpayers and business owners who evade paying their taxes.  

Extending the Statute of Limitations on Tax Debt Owed To The IRS

There are things you can do to extend the time by pausing the clock to extend the time period for collecting the taxes owed. The collection efforts will be halted while specific requests are made.  Review the following possible tax extension options.

Innocent Spouse Relief

For joint tax returns, both spouses are liable for the taxes owed and any penalties, and interest accrued. Even if you become divorced you are still liable for the joint return. Therefore, you are still on the hook with the IRS. However, the IRS will offer relief to spouses where it would not be fair to hold them responsible for their spouse or ex-spouses’ taxes. This action will extend the statute of limitations by about 150 days. There are three types of relief and are governed by different rules and requirements. This process can be complex so consult tax professionals or a tax attorney for legal advice.

  • Underreported income on a joint return without your knowledge.
  • Understated or underpaid tax.
  • Fraudulent Return

Based on the above tax-related issues, you may be afforded tax relief if the IRS converts a joint tax to separate returns based on gross income.  Click here to learn more.

Offer Of Compromise

An Offer of Compromise is when the IRS allows you to pay off your federal unpaid taxes for less than you owe. Once you submit your request it pauses the statute from the period of time you make your request until the decision is made plus 30 days.

Collection Due Process Hearing

This due process hearing allows the taxpayers to appeal IRS liens and levies. During this hearing, you can try to obtain innocent spouse relief, work out a payment plan, or suggest an alternative collection process.

Living Abroad For Six Months Or More

If you live outside of the United States for six consecutive months, then this will pause the Statue of Limitations period. This pause will also extend the statute of limitation for six months after the taxpayer returns.

However, you cannot avoid paying taxes by leaving the country indefinitely.  The IRS can file a lien against your assets no matter whether you live in the United States or a foreign country. Therefore, if you owe taxes the assets you own can still be levied.

Bankruptcy

If the taxpayer files for bankruptcy, the bankruptcy court will immediately issue an automatic stay during the duration of the bankruptcy proceedings plus six months. Bankruptcy courts will not always discharge taxes, you should consult a bankruptcy court attorney.

Military Deferment

While serving in the Armed Forces, the IRS will suspend the collection process, if taxes are owed on basic pay, special pay, and bonuses. Income or bonuses earned for service in a combat zone is not taxable.

The IRS will suspend the Collection Statute Expiration Date (CSED) if the taxpayer is impaired due to their military plus 270 days. If the taxpayer is in active combat service, the CSED will be suspended while they are deployed plus an additional 180 days.

Amended Return

You only have three years from the original date of your filed return to amend it. If the amended return is after the deadline, you will lose any refund that you are entitled to receive. It is in your best interest to resolve tax issues that could result in you receiving or increasing a refund quickly. Three years isn’t much time if your tax-related issue is complex. i.e., divorce or separation.

Economic Hardship

The taxpayer may file Form 911 to claim financial hardship can extend the CSED. The 911 form is a Request for Taxpayer Advocate Service Assistance. If a tax levy or lien would cause unreasonable financial hardship on the taxpayer, it will allow them to apply for tax relief. Therefore, if all regular channels have been exhausted to resolve tax issues and if it is a direct result of the IRS actions or inactions this could be an option.  However, the IRS does have a payment plan option that provides for monthly payments.

Tax Debt Payment Options

Once your taxes are completed and filed with the IRS, if you owe a substantial amount of taxes, it can be overwhelming. Especially if the funds in your bank accounts are not sufficient to pay on the IRS due date. I know that the IRS collections process can be harsh with levies on income and assets in your bank accounts. They can also seize and sell property. However, you can enter into an installment agreement with the IRS.

An installment agreement is a payment plan that allows you to pay what you owe in taxes over an extended period. This could be the best option for you because it will prevent the IRs from levying wage garnishments, and it will suspend the IRS’s collection period. This alone makes the installment plan a good idea.

However, payment plans do not prevent you from accruing interest and some penalty charges until the balance is paid in full. This entire process will suspend the collection period for 30 days. Visit the IRS.gov for more information on payment plans as there are cost associated with setting one up and maintaining it.

Penalty For Not Paying or Filing Taxes

There are penalties for not paying your taxes in the form of interest and penalties. The IRS can offset the taxes owed against future refunds. Also, if you do not file your tax returns there is a penalty for this.  The IRS will generate a substitute return for you if you do not file your taxes. At this point the Collection Statute Expiration Date will be determined based on the assessment date after the Substitute for Return is filed. Then the 10-year period will begin.

Debt Forgiveness

Believe it or not there are circumstances when IRS debt will be forgiven. In order to qualify for IRS debt forgiveness, you have to have filed all your tax returns. You are not to allowed to have any assets, have a limited income, and be in financial hardship. Your tax balance has to be under $50,000. The income of the taxpayer should be under $100,000 for those filing single or $200,000 for married couples filing a joint return.

However, any debt that is canceled, forgiven, or discharged for less than the amount owed is taxable. You are required to report the cancelled amount on your next filed return. For information regarding Form 1099-C, Cancellation of Debt by the IRS.

Recap

As noted above there are various statues of limitations that are outlined in the Internal Revenue Manual. I have only touched upon the basics regarding statutes of limitations and the suspension period for each. Although the IRS is limited in the length of time they can operate, you should make every effort to resolve your tax debt prior to a federal tax lien.

Please note in the case of tax evasion there is an unlimited amount of time that the IRS has for tax audits and assessments. This includes filed and unfiled tax returns.

This content is for informational purposes only.  Please consult a tax professional or tax attorney for unpaid tax debt.  Most will offer a free consultation.

Contact the IRS at 1-800-829-1040 for answers to your federal tax questions 24 hours a day. You can also visit the IRS website for more information and assistance.

Here are some best practices:

  1. Consult a Tax Expert or tax attorney.
  2. Prepare your return on time to avoid penalties and interest.
  3. Understanding the IRS’ statues of limitations.
  4. Know your payment options.
  5. Create an action plan.
  6. Reach out to the IRS.

Things That Could Trigger An Audit.

  1. Math errors and typos
  2. High income
  3. Low income with Earn Income Tax Credit (EITC)
  4. Unreported income
  5. Excessive deductions and credits
  6. Rounded numbers

Additional Reading:

Documents You Should Shred To Avoid Credit Fraud

Can A Bankruptcy Discharge Be Denied

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