Lawsuits, debt collections, and taxes are words that you very likely don’t want to hear. They are, however, necessary for the symbiotic relationship between the government and its citizens.
When you have unpaid taxes, a timer begins for the IRS because, as you’ll soon find out, they can’t chase you forever. Let’s take a deeper look into the IRS statutes of limitations and explain how this could affect your tax situation.
What is the Statute of Limitations on Debt for the IRS?
By definition, a statute of limitations is a federal or state law limiting the period allowed for the IRS to file legal proceedings against an entity. This means if you wanted to charge someone with a crime or bring a lawsuit against them for damages, you’ll need to have done so prior to the statutes’ expiration.
In the case of the IRS, the statute defines how long the IRS can take to collect a tax debt. The collection statute expiration date marks the end of the limitations period. After the limitations period ends, no action can be taken, and the agency can no longer collect the debt. But, it doesn’t mean you get off scot-free as we’ll define later.
How Long Does the IRS Statute of Limitations Last?
According to Internal Revenue Code section 6502, the length of the period for collection after the assessment of a tax liability is ten years. After the limitations period, the collection statute expiration would end the right of the federal court to pursue collection.
The period for collection efforts, however, may be extended according to the Restructuring and Reform Act of 1998, section 3461. The last day the IRS may collect a tax debt is definitively called the Collection Statute Expiration Date, CSED. As the 10 year statute of limitations expiration date approaches, be wary. The IRS will likely take more action with the knowledge that they legally won’t be able to chase after your debts after the expiration.
What Happens if I Ignore my Tax Debt?
Now, reading the last section might have enticed you not to file for taxes. It becomes especially tempting if you’re already late and facing additional penalties and interest. This plan, however, can really only work if you plan to hide out for the rest of your life, or at least for the next 10 years. Anything you do, such as getting a job, registering a vehicle, or buying a piece of land can put you on the IRS’ radar. Under the Internal Revenue Code Section 7201, any willful attempt to evade taxes can be punished by up to 5 years in prison and $250,000 in fines.
How Many Years Back Can The IRS Collect Taxes?
Generally, the IRS observes a 6 year lookback for unfiled returns. However, if they believe you actively attempted to evade taxes, there is no limit to how far back they will assess your tax liability.
When Does the Statute of Limitations Start?
Knowing how much time you have is key to properly budgeting for and paying off your tax debt before the statute of limitations expires (we discussed the consequences of being incapable to do so above).
To answer your question, the statute of limitations starts when the IRS assesses tax liabilities. The tax assessment occurs when you file a tax return or whenever the IRS sends a tax liability directly to you.
Can the Collection Statute Expiration Date Get Extended?
Prior to the 10 year expiry, you may opt to renegotiate your deal to suspend or extend the CSED date of taxes to return to the IRS. The 10 year expiry of the notice, you can toll or suspend the statute of limitations on IRS collections through the following:
What Options Do I Have?
We’ve mentioned pushing back the ten year payment for the amount you owe through bankruptcy, installment agreements, an offer in compromise, living abroad, or assistance orders that will help with the IRS collection effort. You can actually also leverage the closing CSED to ask the IRS for lowered back taxes.
The ten years from when you were notified could go in a blink of an eye. The worst thing you could do is do nothing and let this ten year period slip by. Talk to a tax professional and have a proper tax assessment done to avoid problems with the federal court.
Have any questions or comments? Feel free to contact me.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.