Statute of Limitations for IRS Collections

When you owe back taxes to the IRS, the IRS can only go after you for a specific time. If they do not act within ten years, known as the statute of limitations, your debt will be wiped out.

Afterward, the IRS cannot lawfully collect the back taxes from you. The IRS loses its chance to collect back taxes from thousands of delinquent taxpayers every year.

When Does the Statute of Limitations Begin and End?

The statute of limitation begins when the IRS sends you a notice that you owe them money. It starts as of the date on the notice, and it ends ten years from that start date.

Even if you try to hide from the IRS by not filing your taxes for ten years, this does not conclude the statute of limitations because it has yet to begin. Hiding from the IRS will not help you dodge your tax penalties.

Does the Statute of Limitations Toll?

These ten years may be tolled or paused in between. In other words, it may last more than ten years.

The statute of limitations will be tolled if you:

• File for bankruptcy
• File for innocent spouse
• Come up with a repayment plan with the IRS
• Are sued by the IRS
• Are living outside of the United States for more than six months

Can the Statute of Limitations Restart?

Yes, the statute of limitations may resume after it has started. If you make a payment plan or an offer in compromise with the IRS, then they may have caused you to waive your statute of limitations rights.

Nevertheless, the IRS cannot force you to willingly waive your statute of limitations rights after it has expired. The IRS cannot compel you to pay back your taxes after the ten years have passed.

What Is an Offer in Compromise?

Every tax year, many people cannot pay their taxes in full. The IRS permits some people to make monthly installment payments until the taxes are paid in full.

Some people owe too much money for installment payments to be feasible. These people are eligible for an IRS offer in compromise in certain circumstances.

How Do I Qualify for an Offer in Compromise?

To avoid collecting your tax debt and avoid the IRS placing a tax lien on your property, you can reach an understanding with the IRS called an offer in compromise (OIC). An OIC is a written arrangement between a taxpayer and the IRS that settles a taxpayer’s tax debt. The agreement resolves the debt for less than the full amount owed.

Not every taxpayer qualifies for an offer in compromise. Typically, taxpayers who can pay tax debts by an installment agreement will not qualify for an OIC. The IRS generally approves taxpayers with a debt of less than $10,000 for an installment agreement. The taxpayer must pay off the balance within three years. No minimum payment amount is needed on a weekly, monthly, or yearly basis.

To qualify for an OIC, a taxpayer must satisfy specific minimum prerequisites. The taxpayer must:

• Have filed all tax returns about the debt;
• Have made all required estimated tax payments for the current year. According to the IRS, estimated tax payments are taxes on income not subject to withholding. Income not subject to withholding includes self-employment earnings, alimony money, dividends, interest, and rental income.

Suppose the taxpayer is a business owner with one or more workers. In that circumstance, the taxpayer will only qualify for an OIC if the taxpayer has made all required federal tax deposits for the current quarter.

The IRS will not accept an Offer in Compromise unless the taxpayer offers an amount that exceeds the “Reasonable Collection Potential.” The reasonable collection potential (RCP) is the current liquidation value of a person’s assets, integrated with future income. Future income is the amount collectible from your expected future income after allowing for payment of necessary living expenses. Say an individual earns $5,000.00 a month. The person pays $4,000.00 for necessary living costs out of this amount. As a result, the person’s future income is $1,000 per month.

Once the minimum requirements are met, the taxpayer must show they have a good reason for requesting an Offer in Compromise. The IRS recognizes three valid reasons:

1. There is a doubt about an individual’s tax liability: There is a legitimate conflict between the IRS and the taxpayer as to the amount owed. Conflicts may emerge for any number of reasons. One example of how a conflict arises is when people seek to deduct certain funds from their income. The advantage of doing this is that less income will be taxed. The person believes, in good faith, that a specific part of tax law, called the Internal Revenue Code, authorizes the deduction. The IRS takes an opposing view. If both sides have a credible argument for their position, a conflict exists.
2. There is no doubt about the amount owed, but there is doubt as to whether the IRS can collect the total amount: If the sum of a taxpayer’s income and assets equal an amount less than the total tax debt, the person will be unable to pay the tax debt. Therefore, the IRS will not collect the total amount of the debt.
3. An “effective tax administration” concern exists: Under federal tax law, an effective tax administration exists when the tax is lawfully owed and can be collected in full. Nevertheless, the IRS will accept an OIC because requiring payment in full would cause financial hardship or be unfair to the taxpayer.

An example of an economic hardship that would qualify as an effective tax administration situation is when an individual lives on a fixed income. The person has a disability. Their home has been specially fitted to accommodate the disability. Were the taxpayer demanded to pay the tax under an installment agreement, the taxpayer would be unable to make monthly mortgage payments.

An example of an “unfairness to the taxpayer situation” is when an individual incurs a tax debt. The reason for the debt is that the IRS did not correctly process the individual’s tax return. If not for the IRS error, the person would not have incurred the debt. Under such circumstances, the IRS may accept an offer of compromise to fix the error.

Another “fairness” situation might result in the IRS agreeing to an offer of compromise. Say a taxpayer seeking help contacts the IRS and requests guidance or education. The taxpayer observes the direction or teaching to the best of their ability. However, the advice or instructions have been made in error. Because of the mistake, the taxpayer now has a tax debt. The individual would not have had the debt but for the incorrect advice or instructions. In such a claim, the IRS may accept an offer in compromise for the amount the person would have owed were it not for the mistake.

For the IRS to agree to the offer in compromise, the taxpayer must submit documentation. The documents must indicate when the incorrect advice or instructions were delivered. The taxpayer must be able to determine the name of the IRS worker who gave the guidance or instructions.

Do I Need a Lawyer?

A tax attorney can help you avoid any complications associated with the statute of limitations and your back taxes. If the IRS bullies and forces you to waive your rights to pay them back, a tax lawyer can make them stop.