Many Americans believe that an IRS debt is a lifetime debt and that the tax collector can harass them to the grave. Fortunately, that is not the case! There are legal time limits that restrict the ability of the IRS to examine and collect taxes. Taxes expire at some point, and in many cases, the IRS does not get the money that they were legally entitled to collect.
Basically, the IRS has 10 years from the date it sends its first invoice to collect the tax. The federal tax collector must get the cash before the time runs out. The 10-year rule does not apply to state taxes, as each establishes its own statutes.
For tax assessments conducted after November 5, 1990, the IRS cannot collect the tax after 10 years from the date of the tax assessment in the absence of special circumstances. If you never file a tax return, there is no statute of limitations for the IRS to require, but as a matter of policy, the IRS generally only requires non-taxpayers to file the last 6 to 7 years. If the Internal Revenue Service (IRS) files an application for you using a refund substitute (SFR), you have 10 years from the date you file the SFR to charge you . If a federal tax lien (FTL) is filed against you, it expires and is voided if the underlying statute expires. One can find out when the statute expires on a tax bill by requesting a Record of Accounts (ROA) from the IRS for each tax year owed.
The 10-year rule is not set in stone in all situations, as there are exceptions based on special circumstances that can extend the statute. These are:
1. A bankruptcy in which the tax is not paid in full. Filing for bankruptcy extends the statute at the time the bankruptcy is pending plus 6 months.
2. Orders of assistance to the innocent spouse and the taxpayer. These extend the statute by stopping the IRS Collections Division from enforcement action.
3. Collection of due process appeals. The ability to file a Collection Due Process Appeal (CDP) is a powerful right in the fight against IRS garnishment or seizure. If it is presented on time, it expands the statute, since it also prevents execution.
4. Voluntary exemptions. Execution of a voluntary exemption by a taxpayer to extend the statute is rare these days because the IRS rarely goes after them. In the old days before Taxpayer Bill of Rights II, it was common. The IRS no longer enforces the old exemptions from then on and the new ones are limited to 5 years.
5. Lawsuit to Reduce Tax Liability to Judgment. The IRS can sue to extend the statute by sentencing through the Department of Justice. This is also quite rare.
6. Offer in compromise. An Offer is a settlement proposal and once submitted, if the IRS considers the Offer, it extends the statute while it is being reviewed. If the tax is approved and settled, the IRS FTLs are released and the tax assessment is adjusted accordingly. However, if it is rejected (and more than 60% is rejected), the IRS has more time to collect.
The statute on refunds is 3 years from the due date to collect your refund. If you apply 3 or more years after the due date, the refund is forfeited. 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 relates to 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 examine an audit-filed return 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 audit statute. 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 debt with the IRS, get serious help from a CPA, EA, or attorney who specializes in these matters. Don’t hire an outfit that flies at night from a late-night TV commercial or snappy radio spot.
