In General

For some the only hope of relief from unmanageable federal tax debts may be the statute of limitations on collection. In theory, the IRS has only 10 years from the date of assessment to collect.

However, this 10-year limitation has many exceptions, waivers and overlapping extensions such that in all but the simplest of cases computing the correct “collection statute expiration date” is quite difficult. Nevertheless, thorough planning requires an understanding of how the statute of limitations applies to each client’s case, and a consideration of the statute of limitations consequences of other actions, such as filing an offer in compromise, requesting an installment agreement, seeking a collection due process hearing, or filing a petition in bankruptcy.

The general statute of limitations rule is found in IRC §6502(a)(1), which provides that “(w)here the assessment of any tax imposed by this title has been made . . . such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun within 10 years after the assessment . . .”   Unfortunately, there are exceptions, and then exceptions to the exceptions. The following are some of the more common statutory extensions of the limitations period:

• The time during which the taxpayer’s assets are under the control or custody of a state or federal court, plus 6 months. §6503(b).

• The time during which the taxpayer is outside the U.S. for a continuous period of at least 6 months, and for 6 months after his return. §6503(c).

• The time the IRS holds property wrongfully seized from a third party, or during which it wrongfully has a lien in place against the property of a third party, plus 30 days. §6503(f).

• The time when collection action is barred because the taxpayer is in bankruptcy, plus 6 months. §6503(h).

In addition, an extension of the limitations period can result from a voluntary agreement between the taxpayer and the Service (e.g. the execution of a Form 900 Tax Collection Waiver), or as a consequence of the taxpayer’s voluntary action in invoking other collection-related procedures. These include the following:

• Requesting a Collection Due Process (CDP) Hearing, or seeking judicial review of the results of a hearing. §6330(e)(1).

• Seeking protection from a joint income tax liability as an “innocent spouse” under §6015(b) or §6015(c).6 §6015(e)(2).

• Filing an offer in compromise, or pursuing the administrative appeal of the rejection of an offer in compromise. §6331(i)(5).

• Requesting an installment agreement, or filing an appeal of the rejection of an installment agreement request. §6331(k)(2).

• Filing a Request for Taxpayer Assistance Order with the Office of the Taxpayer Advocate. §7811(d).

Conclusion

The statute of limitations is an important consideration in determining how best to resolve the problems of any client with unmanageable tax debts. Obviously, those who can pay their taxes should pay, and the IRS is well-equipped to encourage them to do so. But for those who truly cannot pay what is owed, the law strikes an appropriate balance by allowing such liabilities to eventually terminate so that the IRS can stop carrying uncollectible accounts and taxpayers can get on with their lives.