Generally, the IRS has ten years from the date that tax is assessed to collect a taxpayer’s delinquent tax liability. But, as many taxpayers who have encountered the IRS know, the answer to this is not straight forward. For the Gen Xers out there, the riddle of how long it takes for a taxpayer to be set free from an IRS tax debt could be compared to the time it takes to get to the center of a tootsie pop. If the taxpayer has the resources to pay the balance due quickly, they can be like the wise old owl who got to center of a tootsie roll pop in three licks and a confident bite. However, for most people facing a tax bill from Uncle Sam, the sweet reward of resolving a tax debt is a rocky road that can take years to lick.
For the IRS to begin collection proceedings, tax must be assessed. A common misconception is that the date of assessment is the date a tax return is submitted to the IRS. However, this is not the case. A tax return is assessed when a taxpayer’s tax liability is recorded and signed by an assessment officer in the office of the Secretary of the Treasury. Typically, for an electronically filed return, it takes the IRS five to six weeks to process the return and assess the tax due. Paper filed returns generally take a few weeks longer to process. The date of assessment can be obtained by calling the IRS or by requesting a tax account transcript for the tax year in question. It is important to know this date as it starts the ten-year period the IRS has to collect the tax and associated interest and penalties due.
The period of time the IRS has to enforce the collection of tax due is known as the statute of limitations. The date that ends the statute of limitations is known as the Collection Statute Expiration Date (CSED). On this date, any unpaid taxes, penalties, and interest that remain on the debt are written off by the IRS and no longer enforceable. Unfortunately, the Collection Statute Expiration Date is not listed on any IRS transcripts that are readily available. The only way to get this date is by contacting the IRS.
Due to consistent budget cuts and an antiquated computer system, it is not uncommon for the IRS to continue to collect on a tax debt whose Collection Statute Expiration Date has passed. So, it is important to be sure the Collection Statute Expiration Date was calculated correctly. Unlike other types of debt, such as credit card balances and unpaid mortgages, which are includable in a taxpayer’s income when the debt is forgiven, tax debt that is written off is not includable in income. What a lifesaver!
Here is where tax debt rules can get a bit sticky, like saltwater taffy in the hands of a toddler on a hot and humid day in August. Taxpayers can have more than one assessment date and Collection Statute Expiration Date in a tax year, which can be a real whopper for a taxpayer. A second assessment date (and therefore, Collection Statute Expiration Date) may occur when a return is audited and additional tax is assessed. Additionally, if a taxpayer files an amended return to make corrections to their originally filed return and additional tax is due, the new tax liability and associated penalties and interest will have new assessment date and Collection Statute Expiration Date. Here is an example.
Candie Kane, who runs a successful salted caramel business, submitted her 2015 federal income tax return on October 15, 2016. She owed $6,540 but did not have the money to pay the tax. The IRS assessed the tax due on the return on December 3, 2016, making the Collection Statute Expiration Date on the $6,540 December 3, 2026.
Several months later while tidying her desk, Candie discovered a copy of an accounts receivable from 2015 stuck underneath her keyboard by a stray dollop of salted caramel. She reviewed her 2015 return and confirmed the income was not included on her Schedule C. Candie amended her 2015 return to include the missing income. The extra income resulted in an additional tax due of $1,500. The assessment date on the $1,500 additional tax due was June 5, 2017, and the Collection Statute Expiration Date is June 5, 2027.
Although the IRS must cease collection activity on Candie’s original tax liability on December 3, 2026, she is not out of the woods, as the IRS has until June 5, 2027 to collect on the additional tax assessed from her 2015 amended return.
Even if an income tax return is not selected for audit or an amended return has not been filed, there can still be more than one Collection Statute Expiration Date on a taxpayer’s account. Certain tax penalties carry their own Collection Statute Expiration Date, such as the Estimated Tax Penalty, Deposit Penalty, Delinquency Penalty, Negligence Penalty, Fraud Penalty, and various civil penalties.
Taxpayers who do not file a required income tax return can still be subject to collection enforcement actions. If enough income is reported to the IRS by third parties such as employers, customers, banks, and investment companies and the taxpayer fails to file an income tax return, the IRS will do the preparation honors for the taxpayer and file a return on their behalf. A return that is prepared by the IRS is known as a Substitute for Return (SFR). The statute of limitations on collection begins on the date the IRS assesses the tax on the substitute for return. The preparation of a substitute for return by the IRS will trigger collection proceedings, but it will not start the statute of limitations on tax assessment. When it comes to substitute for returns, the statute of limitations on assessment never starts. This means that the IRS can come back at any time and assess additional tax. The only way for the statute of limitations on tax assessment to begin on a substitute for return is if the taxpayer prepares and files their own return for the tax year. Generally, once a taxpayer files their return, the IRS has three years to assess additional tax, but the time can be extended under certain circumstances.
What happens if a taxpayer’s debt is a real jawbreaker and they are not able to make payments towards their tax due? Is the statute of limitations on collection paused until the taxpayer can begin to make payments? Thankfully, even if a tax debt is placed on a collection hold (referred to as currently not collectible status) because the taxpayer is not financially able to make payments, the statute of limitations collection period continues to run. If you are hankering for more information on the statute of limitations, TaxAudit’s Director of Tax Services, Arnold van Dyk, Esq., has a video discussing some of the important points. Wunderbar!