The statute of limitations for a tax debt is the time period of ten years the IRS gets to collect back taxes. If the IRS is unable to collect any tax debt amount during this ten-year collection period, the tax debt is considered forgiven.
Calculating the Start of the Statute of Limitations
The ten-year collection period begins from the day the IRS accesses the taxpayer’s tax liability. If you miss the paying deadline, you receive a notice from the IRS informing you of the taxes owed. The date on this notice is the date when the ten-year period starts. If you did not file a return, the IRS files a substitute tax return called the Substitute for Return (SFR) to estimate your tax bill. The date on the SFR starts the statute of limitations. Whichever communication regarding the payment of back taxes is received first is counted as the start of the ten-year clock.
When the Statute of Limitations is Suspended
The statute of limitations is temporarily halted when the IRS is legally stopped from collecting back taxes. The following situations are common examples of when the statute of limitations is suspended:
- If a taxpayer has applied for an Offer in Compromise and the IRS is reviewing the request, the statute of limitations is stopped.
- It is also stopped in case of bankruptcy when the IRS has to stop all collection actions temporarily under the automatic stay.
- When the collection due process hearing is being conducted.
If the IRS cannot enforce collection due to the poor financial condition of the taxpayer, the statute of limitations is not stopped.
Extension of the Statute of Limitations
The collection limitation is not definitive. The IRS has been known to collect back taxes that are more than a decade old. The IRS can also negotiate with a delinquent taxpayer to extend the statute of limitations when the 10-year period is about to expire. They usually offer an attractive payment plan in exchange for extending the limitations for more years.
Taxpayers that have the ability to pay their tax debt should seek a resolution rather than waiting for the statute of limitations to expire. The IRS can use damaging collection actions such as a federal tax lien and tax levy to collect a tax debt during the collection period if the taxpayer has the ability to pay.