Does the IRS Forgive Tax Debt After 10 Years?

November 18, 2021 by Karen Reed, EA
Couple looking at financial paperwork

Yes, indeed, the length of time the IRS is allowed to collect a tax debt is generally limited to ten years, according to the statute of limitations on IRS collections. When the ten years are up, the IRS is required to write the debt off as a bad debt, essentially forgiving it. But is attempting to wait out this period a viable strategy for resolving your tax debt? For most taxpayers, the answer is probably not, though there are certain situations in which it might make perfect sense to take this approach. Let’s explore some common scenarios.

When coming up with a strategy for dealing with tax debt, the first thing to consider is your ability to pay it. Let’s say you are living a comfortable life. You have a job (or run your own business), own a home and have other assets, such as retirement and brokerage accounts. In this situation, the best course of action will likely be to arrange to pay your tax debt in full or negotiate a settlement. Of course, which of these options you choose depends on the amount you owe and the specifics of your financial situation. If you do have the ability to pay but do not make an effort to settle your tax debt, you will expose yourself to great risks. This is because the IRS is required by law to take enforcement action if you do not pay your taxes timely while failing to explain the reason why you cannot pay them. IRS enforcement action could include levying your salary or bank accounts or even seizing your property to satisfy your tax debt. To be sure, these are worst-case scenarios that you will want to avoid whenever possible.

Now let’s talk about a situation in which waiting out the ten-year collections’ statute might make sense. Let’s say you find yourself struggling to pay a tax balance that you’ve been carrying for years. You’ve entered into an installment agreement, but an illness or job loss puts you in danger of defaulting on it. In such a case, the best thing to do is contact the IRS immediately and explain the change in your ability to pay. When the cause is reasonable, and you are unable to make payments without compromising your basic living needs, the IRS will work with you to lower your payments or even put your debt into currently not collectible status. When your tax debt is in currently not collectible status, the IRS will review your situation annually—and if your circumstances do not change, your debt will remain in this status until the statute of limitations expires, at which point the IRS will write off your remaining balance.

As with most things tax-related, it can be a bit complicated to determine when the ten-year collection period runs out for your tax debt. The way it works is that the statute of limitations begins on the date the tax debt is assessed, otherwise known as the Collection Statute Expiration Date. For a tax debt assessment on a tax return that you filed (or on a substitute return that the IRS prepared on your behalf), this is the date the IRS recorded your tax amount due, and you can find it on your tax transcript. You can also have a tax assessment due to an audit, which will give you a different statute expiration date. There is no expiration date when the IRS is able to prove that a fraudulent return was filed. In addition, there are numerous situations in which the collections statute of limitations is extended or suspended, including filing for bankruptcy, submitting a Collection Due Process Hearing Request, filing an Offer in Compromise, and filing an Innocent Spouse Request. The IRS is also required to suspend the statute of limitations while an installment agreement is pending, when the taxpayer is living outside the U.S. for at least six continuous months, for certain military situations, and under certain conditions when the taxpayer requests help from the Taxpayer Advocate Service.

In general, the IRS has only ten years to collect your assessed tax balance, but the agency exists to collect taxes, and they will use all the tools and methods they have available to do so, including wage garnishments, liens, and levies. When you have a tax debt, trying to wait out the clock to let the statute run out is generally not the best strategy in most situations. As we’ve discussed above, however, this approach might make sense in certain circumstances. If you are struggling financially and paying your tax debt is simply not feasible due to considerable hardship, the first option to explore is the currently not collectible status. If you continue to lack the ability to pay your tax debt, your tax debt can remain in this status until the statute runs out and your debt is forgiven.

Trying to figure out the best approach for dealing with tax debt can be stressful and confusing, but a tax professional from TaxAudit can help you determine the best strategy for getting it resolved. The best plan of action might be an affordable installment plan, an offer in compromise to pay less than the amount you owe, or, in the case of severe hardship, a request to have the debt forgiven altogether. Whether you work with a professional or choose to handle your tax debt on your own, be sure to respond quickly to your IRS letter or notice to minimize any additional interest and penalties. Acting quickly to take care of your tax debt will give you the clean slate you need to reach your long-term financial goals.
 

 


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Karen Reed, EA

 

During her years as an audit representative for TaxAudit, Karen successfully defended the company’s members throughout the entire federal and state audit processes, handled cases assigned to US Tax Court, and developed procedures to make the audit process easier for taxpayers. Karen attributes a great deal of her tax acumen to the six tax seasons she spent as a return reviewer, analyzing thousands of returns. Responding in writing to questions from taxpayers, she became familiar with the common mistakes self-preparers make. Karen was previously the manager of the Tax Education and Research Department and the Director of Communications at TaxAudit. Her tax advice has been featured in U.S. News and World Report, the Los Angeles Times, the Chicago Tribune, and other publications.


 

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