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Statutes of Limitation on Assessment and Collection

One of the most common questions I am asked by taxpayers is “How long can the IRS try to collect my liability?” It’s a good question, and one that would seem to have a quick, easy answer.

Judging purely by the length of this article, however, the answer is never as simple as it might seem.

On Statutes of Limitation on Assessment and Collection

the statutes of limitation on assessment and collection
Easy answer?

With the full understanding that “It depends” is the least satisfying answer to any legal question, nonetheless, it is often the most accurate. (For most lawyers “it depends” is about as automatic a response as a thirteen-year-old girl’s intercessory use of the word “like.” Like, all the time.) Though it is true that many factors play into the amount of time that the IRS can collect, nevertheless, there are two rules of thumb when it comes to the statutes of limitation on assessment and collection.

 

  1. The IRS has three years to assess tax from the time the return was filed; unless it has more time. It depends.
  2. The IRS has ten years to collect the tax from the time the tax was assessed; unless it has more time. It depends.

Statute of Limitation on Assessment of Tax

The IRS must assess any tax within three years after the return was filed, whether the return was filed on time or not.[1] If you read between the lines, this means that if a taxpayer fails to file his return, the statute of limitation on assessment remains open indefinitely.[2] Nevertheless, it is the policy of the IRS to generally not look back more than six years for unfiled returns.[3]

Thus, when Cousin Elmer (who we met in this article) comes to you and tearfully admits that he has not filed income tax returns for the last 25 years, you offer him a tissue and the reassurance that he will only have to pay the family’s CPA to prepare six years of past due returns.

SOL Self
But really, you must report your liability correctly. Please.

When a return is filed reporting tax due, the taxpayer has “self-assessed” the tax. This means that if the taxpayer does not pay the amount shown as due on the return, the IRS need not make an independent assessment of the tax. It will, however, assess a failure to pay penalty,[4] which like any other tax must be assessed within three years from the time the return was filed.

Similarly, if the IRS determines that the amount reported on a timely filed return is not an accurate reflection of the taxpayer’s actual liability, the IRS must assess the underpayment within three years. There are a few narrow but important exceptions to this three-year rule.

First, if the taxpayer made a false return with the intent to evade tax or to willfully “defeat or evade” tax, the tax may be assessed at any time.[5]

SOL Im SorrySecond, a taxpayer may agree to extend the statute of limitations on assessment.[6] This arises most commonly after the IRS has issued a notice of deficiency, which is the IRS’s polite way of telling a taxpayer that it believes that there was an understatement of tax on the return.[7] If the taxpayer is attempting to settle with the IRS, but the three-year window on assessment is closing quickly, the IRS will “request” that the taxpayer extend the statute of limitations on assessment.

Taxpayers always buck at the mere suggestion of allowing the IRS more time to make the assessment, and so I have to politely lower their hackles by explaining that the IRS will assess the tax whether or not the extension request is granted. If the taxpayer wants the IRS to walk away from the bargaining table, there is no better way to ensure this result than to refuse to extend the statute of limitations on assessment. It’s an IRS hot-button.

Third, if there has been a “substantial omission of items,” meaning that the taxpayer has omitted from its reported income an amount that is in excess of 25% of the income actually reported on the return, then the IRS may assess the tax within six years after the return was filed.[8]

SOL Sleeping DogThere are a dozen or so other exceptions to the three-year rule on assessment, but most will not apply to the average taxpayer, such as Cousin Elmer.

However, for sake of brevity, we will let those sleeping dogs lie.

Statute of Limitation on Collection of Tax

SOL Just Wait
Calm down, princess; I’m getting to that.

“But wait,” you say, “I don’t care about assessment. I asked you about collection.”

We care about the statute of limitations on assessment because it directly affects the statute of limitations for collection. If and when the IRS timely makes an assessment of tax (including penalties and interest), the IRS may collect the tax within ten years after the assessment.[9] This means that once the ten-year period has run, if the taxpayer owes additional tax, the jig is up, and the IRS may not continue to try to collect the liability from the taxpayer.

SOL Mine
To be clear, the IRS in this GIF metaphor is the dog, the taxpayer is the hamster, and the carrot treat is everything that poor hamster-taxpayer ever held dear.

As we discussed in a previous Taxing, Briefly article, the IRS has two primary mechanisms for collection—liens and levies. Without going into too much detail, a Federal tax lien attaches to all property in which the taxpayer has an interest.[10] The reach is exceptionally broad, and the lien follows the property even if the taxpayer sells or transfers it.[11]

A lien arises automatically when a taxpayer is liable to pay any federal tax and fails to pay upon notice and demand.[12] If the taxpayer “neglects or refuses to pay” the assessed tax, then the lien is deemed to relate back to the assessment date.[13] It is critical to note that a Federal tax lien does not have to be recorded for it to be valid against the taxpayer and most third parties, which is why an unrecorded lien is often referred to as a “silent lien” or a “secret lien.”[14]

A lien is merely a security interest in a taxpayer’s property. In order to actually collect against the taxpayer, the IRS must “enforce” its lien. Enforcement comes in three flavors.

The first, and most common, is the filing of a Notice of Federal Tax Lien. Tax liens are mean, nasty, ugly things. They affect your credit and most importantly your ability to sell property, such as your home. Thus, the filing of a Notice of Federal Tax Lien is quite the strong-arm tactic by the IRS.

If a taxpayer does not get the message, the IRS will then issue a Notice of Intent to Levy, threatening to garnish wages, seize and auction off property, etc.[15] once again, this generally is enough for taxpayer to “cooperate” with the IRS and to either pay off its liability in full, or enter into an agreement with the IRS to pay over a period of time (an installment agreement),[16] or pay as much as the taxpayer can towards the liability (an offer-in-compromise).[17]

SOL GimmeFinally, the IRS can file a lawsuit against the taxpayer to “reduce” its lien “to judgment.”[18] The IRS generally institutes a suit to reduce the tax liability to judgment to obtain an extension on the time for collection of the tax liability,[19] because the judgment extends the federal tax lien and the related administrative enforcement remedies.[20] There is a lot packed into this, and we will explore suits to reduce Lien to judgment in another article.

As noted above, generally, an assessment may be collected by levy or a court proceeding only if the levy or the proceeding is begun within ten years after the date of assessment. Because the only means for enforcing the Federal tax lien are by levy or judgment, IRC § 6502 effectively defines the date on which the lien becomes unenforceable by reason of lapse of time.[21] Thus, after ten years, if no intervening events have “tolled” the statute of limitations for collection, the lien is released.

Extension of Statute of Limitations on Collection

As with the statute of limitations on assessment, the ten-year limitations period may be extended for a number of reasons, some more common than others.

The first, and most common “tolling event,” occurs when a taxpayer simply consents to the extension. As before, taxpayers initially dismiss the idea of extending the time that the IRS has to collect a liability with haughty indignation and audible scoffing.

SOL Take Home
The “they can take your home” bit is usually the most convincing argument.

It’s at this time that I have to remind a taxpayer that a “notice” of intent to levy is a lot different than the IRS actually levying, garnishing bank accounts or wages, and/or seizing their home and Ferrari to sell at auction.

If a taxpayer is outside the United States for more than six months, the limitations period is extended while the taxpayer remains abroad.[22] If a taxpayer files a petition with the Tax Court, the limitations period is “tolled” while the case is pending (plus 60 days).[23]

If a taxpayer files a collection due process (CDP) appeal—arguing that a lien or levy is improper—the limitations period is tolled until the CDP proceeding is resolved, whether after a notice of determination is issued after a CDP hearing or later if a Tax Court petition is filed contesting the notice of determination.[24]

The limitations period is suspended while an offer-in-compromise is pending with the IRS (and for 30 days following the rejection of the offer, unless the rejection is timely appealed, and then during the period that the rejection is being considered by Appeals).[25] Similarly, the statute of limitations is suspended while a request for an installment agreement is pending with the IRS (and for 30 days following the rejection of the request, unless the rejection is timely appealed, and then during the period that the rejection is being considered by Appeals).[26]

SOL InnocentThe last of the more common reasons that the limitations period for collection will be suspended is when a taxpayer makes a qualified request for innocent spouse relief under IRC § 6015.[27] The period is tolled until the earlier of the date that the IRS files a waiver of liability (that is, the date the IRS officially grants the requesting spouse’s relief from liability); the expiration of the 90-day period for petitioning the Tax Court if relief is denied; or, if a petition is filed, when the Tax Court decision becomes final. An additional 60 days is tacked on for good measure, for innocent spouse extensions.[28]

So, in the End, It Does Depend

SOL No GuaranteesI don’t say “it depends” because I am a fan of ambiguity. If I could guarantee that nothing the taxpayer would do could extend the statutes of limitations on assessment and collection, it would be my absolute delight to only have to remember the rules of thumb rather than all of the flipping exceptions to the rules. Nonetheless, there are a lot of factors that go into determining how far down the road that tax lien will be hanging over your head.

Once an installment agreement is entered into, for example, if the taxpayer does not default—which is a big IF—then I can determine with some certainty when the lien will self-release. But for Cousin Elmer, who lived for eighteen months in Bavaria while an installment agreement was pending, determining the expiration of the collection statute of limitations is a complex process, generally involving an Excel spreadsheet and my paralegal checking behind me to make sure I haven’t missed sixty days here or there.

At the end of the day, the IRS does have a finite time to collect a liability against a taxpayer. That is, of course, unless the IRS files suit, reduces their lien to judgment, and…well…then, it depends.


Footnotes:

  1. IRC § 6501(a).
  2. IRC § 6501(c)(3).
  3. See IRS Policy Statement 5-133 (Delinquent Returns—Enforcement of Filing Requirements), contained at IRM pt. 1.2.1.6.18. The IRS may look back further than six years if certain factors are present, including a taxpayer’s prior history of noncompliance, the existence of income from illegal sources, the effect upon voluntary compliance, the anticipated revenue, and the collectibility of the liability in relation to the time and effort required to determine tax due. Consideration is also given to any “special circumstances” in the case of a particular taxpayer, class of taxpayer, or industry, or which may be peculiar to the class of tax involved.
  4. IRC § 6651(a)(2).
  5. IRC § 6501(c)(1) (false return); IRC § 6501(c)(2) (willful attempt to evade tax).
  6. IRC § 6501(c)(4).
  7. See IRC § 6212.
  8. IRC § 6501(e)(1).
  9. IRC § 6502(a)(1).
  10. See IRC § 6321.
  11. Virtually anything of value belonging to the taxpayer is subject to the federal tax lien. In addition, anything acquired by the taxpayer after the lien arises is immediately attached by the lien. On the other hand, property transferred before assessment of the tax (e.g., property divided pursuant to a divorce decree) is not subject to the lien. See, e.g., United States v. Gibbons, 71 F.3d 1496 (10th Cir. 1995); see also IRM 5.17.2.7.1.19 (reflecting IRS’s position that federal tax lien does not attach to property once conveyance divests taxpayer of interest in property).
  12. Id.
  13. IRC § 6322.
  14. An IRC § 6321 “silent” or “secret” lien, however, is not perfected against bona fide purchasers, holders of security interests, mechanic’s lienors, or judgment lien creditors until the Notice of Federal Tax Lien (NFTL) is filed. IRC § 6323(a).
  15. IRC § 6330.
  16. IRC § 6159.
  17. IRC § 7122.
  18. IRC § 7402. The IRS may also file suit to “foreclose” its lien under IRC § 7403, though these suits are generally limited to specific property in which the taxpayer’s interest or the IRS’s interest is uncertain.
  19. IRM 34.6.2.1(1).
  20. Treas. Reg. § 301.6502-1(c).
  21. IRC § 6323(a).
  22. IRC § 6503(b).
  23. IRC § 6503(a)(1).
  24. IRC § 6503(e)(1).
  25. IRC § 6331(k)(1).
  26. IRC § 6331(k)(2).
  27. IRC § 6015(e).
  28. Id.
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