Many Americans believe that a debt to the IRS is a debt for life and that the tax collector can hound them to the grave. Fortunately, that is not the case! There are time limits set by law that restrict the ability of the IRS to examine and collect taxes. Taxes are due at some point, and in many cases, the IRS does not receive the money they were legally entitled to collect.
Basically, the IRS has 10 years from the date you send your first bill to collect the tax. The federal tax collector must get the cash before time runs out. The 10-year rule does not apply to state taxes as each sets its own statutes.
For tax assessments made after November 5, 1990, the IRS cannot collect the tax after 10 years from the date of the tax assessment absent special circumstances. If you never file a tax return, there is no statute of limitations on the IRS that requires you to file, but as a matter of policy, the IRS generally only requires non-filers to file for the last 6-7 years. If the IRS files a return for you doing a Substitute for Return (SFR), they have 10 years from the date they file the SFR to collect from you. If there is a Federal Tax Lien (FTL) against you, it expires and is voided if the underlying statute expires. You can find out when the statute is due on a tax bill by requesting a Record of Accounts (ROA) from the IRS for each tax year you owe.
The 10-year rule is not set in stone in all situations, as there are exceptions based on special circumstances that may extend the statute. These are:
1. A bankruptcy in which the tax is not fully discharged. Filing bankruptcy extends the statute by the time the bankruptcy is pending plus 6 months.
2. Innocent Spouse and Taxpayer Assistance Orders. These extend the statute by suspending the enforcement action of the IRS Collection Division.
3. Compilation of Due Process Appeals. The ability to file a Collection Due Process (CDP) Appeal is a powerful right in fighting an IRS lien or forfeiture. If filed on time, it extends the statute as it also prevents execution.
4. Voluntary Resignations. Executing a voluntary waiver by a taxpayer to extend the statute is rare these days because the IRS doesn’t usually pursue them. In the old days before the Taxpayer Bill of Rights II, it was common. The IRS no longer enforces the old exemptions at that time and the new ones are limited to 5 years.
5. Demand to Reduce a Tax Liability to Judgment. The IRS can sue to extend the statute by judgment through the Department of Justice. This is also quite rare.
6. Offer of Compromise. An Offer is a settlement proposal and, once submitted, if the IRS considers the Offer, it extends the status while it is under review. If the tax is approved and settled, the IRS FTLs are released and the tax determination is adjusted accordingly. However, if it is rejected (and more than 60% are rejected), the IRS will have more time to collect.
The statute on refunds is 3 years from the due date to collect your refund. If you file 3 or more years after the expiration date, the refund is lost. In some cases, it is possible to request a refund beyond three years. If you pay the tax, you can file a claim for refund within 2 years of payment. If your claim involves a bad debt or worthless security, you have 7 years to file a claim.
The flip side of the 3-year refund rule is that the IRS only has 3 years to review a return filed for audit in most cases. Now, the tax code is complicated and there are exceptions to these rules. If you have committed fraud or tax evasion, there is no statute for auditing. There is also a 6 year rule for auditing in cases of “substantial omission” of 25% or more in revenue. But for most people, the three-year statute will apply to audits.
If you have serious IRS debt, get some serious help from a CPA, EA, or attorney who focuses on these matters. Don’t buy a night flight outfit from a late-night TV commercial or snappy radio ad.