Ten-Year Clock on IRS Tax Debt

Most people don’t know that the IRS stops trying to collect on tax debt after 10 years. This 10-year clock can be valuable to people who owe back taxes from several years ago.

The statute of limitation on collecting tax owed is at 26 U.S.Code § 6502(a)(1): the IRS may start a collection proceeding only within 10 years after the assessment of the tax. The “assessment” date is determined as follows: (1) if the tax return was filed before the due date for that year, then the assessment date is the due date for that year (for example, 2016 tax returns are due by April 17, 2017). Thus, a 2016 return filed on March 13, 2017, will have an assessment date of April 17, 2017. (2) If the tax return is late-filed after the due date for that year, then the assessment date is the date the return arrives at the IRS. The assessment date starts the clock, and the IRS tries to beat the clock by collecting all taxes owed before the 10 years run out.Four actions will stop the 10-year clock and add to the time the IRS has to collect back taxes. First, filing for bankruptcy protection stops the clock until the bankruptcy court discharges the debt/case. Since it typically takes 4-6 months from the filing to the discharge of a bankruptcy case, a bankruptcy generally adds 4-6 months (and then another 60 days) to the 10-year clock. Second, filing a request with the IRS for a Collection Due Process hearing under 26 U.S. Code § 6330 stops the clock until the hearing occurs; it is currently takes an average of six months to get a hearing result. Third, submitting an Offer in Compromise to the IRS stops the clock until the offer is rejected or accepted, plus 30 days); it currently takes an average of two years to get an IRS decision on an Offer in Compromise. Finally, submitting a request for an installment agreement with the IRS stops the clock from the date the request is submitted until the IRS acts on the request, plus 30 days; it currently takes an average of two months for the IRS approve installment agreements.

Ten years is a long time. I rarely advise clients to try to run out the clock: anyone trying to avoid paying the IRS would need to join the underground economy, and, as a citizen of the United States, I have an interest in seeing to it that my neighbor pays the same tax that I do. But sometimes a client will come to me with a situation where the IRS has just figured out where he is, and there are only nine months left until the Collection Statute Expiration Date (CSED, for those of us in the know). In this situation, I might advise the client to just not contact the IRS, and attempt to get by without putting money in a bank account.

I feel much better about putting clients into installment agreements. Here, the IRS investigates the taxpayer’s financial situation, and agrees to accept a monthly payment in exchange for not levying on the taxpayer. It is a way to reach a truce with a most powerful government agency, an agency that can create chaos in one’s life. Sometimes, the taxpayer’s situation prevents him from paying more than a small token toward his large tax debt. During the time the installment agreement is in effect, the 10-year clock continues to run. When well-managed, this process may allow a portion of a taxpayer’s liability to die a natural death while he is still paying it off.

Note that this article speaks only of the IRS. California income tax is collected by the Franchise Tax Board, under California statutes. Until 2006, the FTB had no statute of limitations on collection; in that year, the legislature passed a law providing for a 20-year collection statute. Rev. & Tax Code § 19255. The statute provides for the FTB to collect a liability for 20 years after the latest tax liability becomes due and payable. Let’s say that 16 years after the assessment, the FTB files a notice of tax lien and charges a $35 lien filing fee. That action, according to the FTB, starts the 20-year clock all over again.

Conclusion: you can sometimes get out of paying federal income tax by being clever, but you can’t get out of the state tax so easily.

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