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Understanding The IRS Statute of Limitations

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Did you know that there is an IRS statute of limitations that defines how long the government can pursue collections actions for outstanding tax debt? Generally, the IRS has up to 10 years to collect any taxes owed. Trying to understand the statute, however, can be a bit tricky. That’s because the amount of time may be extended due to certain circumstances, such as filing for bankruptcy. The wording of the statute is also very important to understand.

When Does the IRS Statute of Limitations Clock Start?

Although the IRS cannot pursue your back taxes forever, it’s important to understand when the clock actually starts ticking. Title 26 IRS Code § 6502(a) states that the IRS may collect “within 10 years after the assessment of the tax.”

What exactly does that mean? Unfortunately, most people make the mistake of thinking that they can simply avoid filing taxes and after 10 years the debt will go away. This is not the case. The clock will start ticking when the IRS files a Substitute for Return (SFR) and sends you a bill. If you filed your taxes but didn’t pay in full, the clock starts when you receive your first bill for the outstanding amount.

As the deadline moves closer, the IRS is likely to take more aggressive collection actions. In some cases, as you will see, the 10-year statute of limitations period can also be extended.

Extending the 10-Year Collection Period

Under certain circumstances, the 10-year IRS statute of limitations can be longer than 10 years.

Suspension Due to Bankruptcy

If you file for bankruptcy and the court issues an automatic stay, the IRS is legally barred from collecting your tax debt during the proceedings. This will put the statute of limitations clock on hold. Six months after your bankruptcy case closes, however, the IRS can once again pursue collection of any unpaid taxes that weren’t discharged. Regardless of how long your bankruptcy case lingers, the 10-year limitation will not expire. It will simply pick up where it left off once the IRS has the right to pursue collection actions.

Suspension Due to Tax Relief Request

When you apply for an IRS installment agreement or an Offer in Compromise, the collection clock will temporarily stop while the IRS considers your request for tax relief. It will also be paused:

  • 30 days after your request is rejected;
  • 30 days after you withdraw/terminate a request; and
  • During the appeal process

A request for innocent spouse relief will also suspend the statute until the expiration of the 90-day tax court petition period. If you file an appeal after denial, the clock will not resume until after the final court decision, plus 60 days.

Voluntary Extension

Although it’s fairly uncommon for the IRS to ask taxpayers to voluntarily agree to extending the 10-year collection limitation when entering into an installment agreement, it may happen. In some cases, this can be as much as an additional six years (five additional years, plus one year to account for changes in the agreement). Before agreeing to any extension, however,  speak with a tax professional and carefully weigh your options.

Military Service

The 10-year clock may be suspended during military service, plus 270 days, if the government’s ability to collect is impaired by such service. If you’re in a combat zone, the statute of limitations may also be suspended, plus an additional 180 days.

Overseas Travel

If you reside outside of the United States for more than six months, the clock will be suspended indefinitely. Six months after your return, the clock will once again resume.

Tax Court Judgment

In rare cases, where a taxpayer owes millions, the IRS may also try to obtain a judgment in federal tax court. When this happens, the IRS statute of limitations is superseded by the court’s expiration limits, which may extend well past 10 years.

Tax Fraud or Tax Evasion

If you try to hide income or file a fraudulent tax return, the IRS statute of limitations does not apply. The government can continue to pursue collection actions indefinitely whenever you commit tax fraud or tax evasion.

Explore Your Options

As you can see, the IRS statute of limitations has many facets. You can’t simply hope to stay off their radar for 10 years and have your tax debt wiped clean. At some point, they will catch up with you. If you have unfiled tax returns or owe back taxes, it’s best to consult with a tax professional and explore your options before things escalate. To schedule a free consultation with a Tax Defense Network tax pro, call 855-476-6920 today!