The IRS’s collection power is bound by something called a state of limitations. Generally, a statute of limitations is an expiration date for legal claims. It defines when a claim must be brought, and the when is very precise. Even if you miss the statute of limitations by one day, your claim will expire.
The IRS collection power is limited by a statute of limitation which bars the IRS from collecting on a tax debt after ten years. While this basic rule is clear cut, its application is anything but. There are two major complicating factors to navigating a statute of limitations: when do you start counting and, after its started, what pauses the clock?
When Does the Statute Start Counting Against the IRS?
The clock starts to tick against the IRS when they finalize an assessment. An assessment can be simple, like a determination that additional tax is due above and beyond your tax withholdings for the year, or it can be more complex, like in cases of penalties assessed for malfeasance.
Speaking of a taxpayer’s tax debt as a single conglomerated amount is a handy heuristic device, but the IRS sees each assessment it makes as a different event. Thus in a single tax year, there can be several discrete assessments that add up to a total liability. The statute of limitations clock starts ticking for each of these different assessments when they are finalized by the IRS. This means that in a single year, the IRS can have multiple ten year expiration dates that they are tracking for different assessments.
It is impossible for the IRS to track each of these different expiration dates, or Collection Statute Expiration Dates (CSED) as they call them, manually. Instead the IRS uses an automated system which tracks each and every assessment on your account and keeps track of when the expiration date expires.
What Pauses the Expiration Date?
A taxpayer may consent to an extension of the statute of limitations, though it is now rare for the IRS to seek this consent. It is much more common to see events affecting the taxpayer’s liability or ability to pay pause the clock automatically. Filing bankruptcy, seeking a collection due process appeal, requesting an offer in compromise, asking to be treated as an innocent spouse, or living overseas are all actions taken by the taxpayer that can extend the expiration date. The IRS may also extend the statute by filing a suit asking the court to reduce the tax liability to a judgment.
All of these events will suspend the IRS ability to collect while the events are ongoing and, in many cases, will continue to pause the statute for some time after the event has ended. For example, a taxpayer’s expiration date will be paused while he or she goes through a bankruptcy and for six months after the bankruptcy is concluded.
In conclusion, it is worth noting two other burdens on the taxpayer. If the taxpayer fails to file his own taxes and the IRS files a substitute for return, then the IRS is not limited by a statute of limitations until the taxpayer files. The second burden is the taxpayer’s ability to claim an unpaid refund. While the IRS has a ten year window to collect from you, you only have a three year window to collect from them.