“Statutes of limitations” limit the time when actions to enforce legal rights (including IRS collection) must be taken, and after which enforcement is prohibited. There are 2 statutes of limitations for taxes. The IRS has:
- 3 years to change (audit) your return (6 for “substantial understatement of income”, or forever in the case of fraud, and the period does not start when no return is filed, i.e., forever), and
- 10 years to collect the tax after “assessment“.
“Assessment” is a tax term for when the IRS can maintain a tax is due and try to collect it. Until a tax is assessed the IRS can not try to collect it (except it may make “jeopardy assessments” E.g., if the IRS believes a taxpayer is about to leave the country making collection unlikely). Your filing a return is “self-assessment” and gives your consent for the IRS to assess the tax. The IRS cannot assess or collect tax until all procedural and appeal rights have been used, lapsed, or you agree to assessment.
Delay in assessment
Assessment can occur a significant time after a return is due, e.g., because of an audit, protest, Tax Court proceedings, and further appeals, etc. If you did not file a return, the IRS likely will request a return. If the return is not provided the IRS will go through the appropriate“process” and then proceed to “assess” a tax amount. Delay occurs in assessing the Internal Revenue Code (“IRC”) § 6672 “trust fund recovery penalty” (personal liability for those persons responsible to collect and pay over employment taxes who “willfully” fail to do so), because the IRS can take a year or more to act after an employer fails to pay employment taxes, and takes additional time attempting to collect from the employer before trying to assess responsible persons. Responsible persons also have procedural or appeal rights that can result in further delay in assessment.
Because assessment can take place a considerable time after e.g., the “normal” return due date, the expiration of the statute of limitations can be long after the time it first seems like it would expire.
Extension of statute of limitations
Filing bankruptcy extends the 10 year period for the time the bankruptcy is pending plus 6 months. This is only important if the taxes are not discharged. Note that discharge of taxes does NOT extinguish the tax lien which continues to encumber property after discharge for the remainder of the limitations period. See IRC § 6503(h) and IRM 18.104.22.168.
Filing an offer in compromise extends the 10 year period by the time the IRS considers the offer (e.g., 10 years plus the amount of time the IRS takes to consider the offer) (note this rule has changed at different times so a careful examination of the time the offer was filed and was pending may be required). This is only important if the offer is not accepted and collection continues because an accepted offer resolves the collection matter.
Requesting a collection due process (“CDP”) hearing in response to an IRS Final Notice of Intent to Levy extends the time the period by the time the hearing is pending.
Filing a request for innocent spouse relief suspends the limitations period until the 90 day period for petitioning the Tax Court expires. If a Tax Court petition is filed after an IRS denial, time is tolled until the Tax Court decision becomes final, plus 60 days. See IRC § 6015(e) and IRM 22.214.171.124.
Filing a Taxpayer Assistance Order to stop IRS actions (Form 911) suspends the statute of limitations on collection while IRS review is pending. See IRC § 7811(d) and IRM 13.1.14.
Appealing the IRS refusal or taxpayers’ default of an installment agreement extended the limitation period during the appeal. See IRC § 6331(k)(2)(d).
You can voluntarily extend the statute of limitations. You might be willing to extend the limitations period to enter into an installment agreement with the IRS (the IRS no longer requests taxpayers to extend the statute of limitations in exchange for agreeing to enter into an installment agreement) and avoid other enforced collection action (e.g., a levy on your bank account or wage garnishment). Installment agreements are voluntary for both taxpayers and the IRS, and the IRS is not required to accept an installment agreement.
Previously the IRS would not enter into an installment agreement near the end of the limitations period if the installments will not pay the taxes in full before the limitations periods ends unless the taxpayer extends the limitations period. The IRS would ask for an extension only 1 time for 5 years as a condition of its agreement to an installment agreement, and will not ask for another extension even if the installment agreement will not pay the taxes in full before the end of the additional 5 years.
“Partial pay installment agreement”
Currently the IRS will enter into a “partial pay agreement“, agreeing to an installment agreement for the amount your financial information currently shows you can pay, updating the amount approximately every 2 years, until the statute of limitations expires. The IRS no longer asks you to extend the statute of limitations on collections.
The IRS can sue you and reduce the tax debt to judgment prior to the end of the limitations period to avoid the tax becoming uncollectible. Whether the IRS will sue generally depends on the possibility of collection after the 10 years. In the commercial world if you do not collect in 90 days it is unlikely you will ever collect. The IRS has much more effective collection tools than most creditors (enforced collection). If the IRS has not been able to collect in 10 years, it is likely the IRS will let the limitations period expire and the tax will become “un-collectible”. Thus, if you can convince the IRS to place you in currently not collectible status and keep you there until the limitations period expires the tax problem may be resolved.