Let's start with the good news: the IRS has a limited amount of time to collect back taxes! For a lot of people, that statement right there will help them breathe a sigh of relief.
Simply put, the IRS only has ten years to collect back taxes before their legal right to do so is suspended. But, before you get too excited, it's my moral obligation to tell you that it's not as easy as finding a nice place to hide and waiting out those ten years before coming back up for air; nothing with the IRS is ever easy. So, let's take a look at some of the ins-and-outs of the IRS statute of limitations on collections (also known as the Collection Statute Expiration Date – CSED for short) and what obstacles should be avoided.
You must have a tax debt assessed for the IRS "clock" to start ticking
First, if you don't file a tax return, the ten-year period will never start. That is why hiding from the IRS just leads to an infinite debt. If it's not assessed, then everything is at a complete and total standstill.
Also, if the IRS files a tax return for you in the process — called a 'Substitute Filed Return — the IRS could technically go back and assess you additional tax. Not only that, but that additional tax will have an entirely different CSED.
Finally, if you are audited or assessed an additional tax, that ten-year period is linked to the assessment and not to the date you originally filed the return.
The point here is that it is of the utmost importance that you have your tax debt assessed. Until you do you're just treading water, not getting any closer to land and wearing yourself out in the process. The worst thing you can do for your mental health in this kind of situation is to hide from the IRS. Not only is nothing getting done, but you'll spend your days dreading opening your mail and your nights wondering when you'll be found out. It's not always pretty when you bring your tax debt out into the open, but it provides you the opportunity to find resolution.
Filing an Offer in Compromise will prolong the IRS's collection window
Some things stop, or "toll", the ten-year period in which the IRS has to collect a tax debt. Most people aren't aware, but every time you file an Offer in Compromise, you toll the clock. For those who keep filing offer after offer, they're doing nothing more than giving the IRS more time to take everything they can. While the Offer in Compromise program can be a great way to solve a tax problem, not everyone qualifies and it isn't always the best possible resolution strategy. So, filing an Offer in Compromise that is likely to be rejected has a strong possibility of hurting you by giving the IRS more time to collect in the future.
For those asking, "Why would I file multiple offers?" you're asking a good question. A seasoned tax attorney should know that filing multiple offer in compromises is not a likely a good course of action. However, for a number of "tax resolution experts" (i.e., scam companies), they do nothing more than file offer after offer. Not only does this show the IRS that you aren't taking your debt seriously, but it also puts your CSED on hold time and time again.
Filing bankruptcy will toll the statute of limitations
Yes, filing bankruptcy may solve a tax debt. But again, you have to be aware that when you file bankruptcy, the statute of limitations is tolled. For those filing Chapter 7 bankruptcy (primarily for those who are unable to pay anything back), the tax debt will definitely discharge or completely eliminate the back tax debt, so this isn't a major issue.
The main problem we see is when taxpayers file Chapter 13 repayment plans. If the repayment plan entirely satisfies the tax debt, then there are no worries. The statute of limitations on $0 is nothing you'd lose sleep over, right? But what happens if you default or are unable to make the monthly Chapter 13 repayments to the IRS? In that case, the IRS gets the best of both worlds: they receive your monthly payments via Chapter 13, while — at the same time — they have no legal obligation to move the "collection clock."
Also of interest with Chapter 13, there is something called GAP interest which can creep up on you. GAP interest is the interest that accrues on the priority tax debt (like back payroll tax trust fund taxes) between the time that the bankruptcy petition is filed and the time that the reorganization plan is confirmed.
Filing a Collection Due Process or a Tax Court petition extends the IRS's window to collect
When you are issued a Final Notice of Intent to Levy or a Federal Notice of Tax Lien, you have the right to request something called a Collection Due Process Hearing. A Collection Due Process (CDP) is conducted by IRS appeals, and it is your opportunity to present a collection alternative or present evidence why a levy should not be issued or a lien should be released or withdrawn. A CDP is your chance to make your voice heard and present viable options to avoid undesirable actions on the part of the IRS.
We find CDP hearings to be incredibly helpful. In the rare case we are unable to reach an agreement with the IRS, we do have the ability to file a Tax Court petition, which gives us yet another opportunity to reach a satisfactory settlement for our clients. The downside is that while you are in an appeal with IRS Appeals or in Tax Court, the ten-year statute of limitations is tolled. And sometimes, especially with Tax Court, it can take years to reach a final determination. Each and every day, each and every month, and each and every year is time that the "collections clock" is not running. That time can add up to be quite substantial, and sometimes the benefits of having your day in hearing/court are outweighed by whittling more time off your CSED.
Filing an appeal with the IRS is something to take seriously. View it exactly like the legal proceeding it is, and appreciate that there are risks to presenting a proposal that isn't based on established law. There is a time and a place for an appeal, but it needs to be reasonable in order to not waste your time and to avoid giving the IRS the impression that you aren't taking your debt seriously.
Being outside the US stops the statute of limitations
Unfortunately, in addition to not being able to hole up in a cave in the US, we're also going to have to scratch off jetting to somewhere sunny — Spain or Portugal perhaps? — and sitting on a beach sipping sangria until your debt runs out. If you're outside of the bounds of the US, your debt will continue on indefinitely (with the caveat that the IRS actually keeps track of where you are).
While this is the rule, the IRS doesn't seem to know how to code cases correctly so that the statute of limitations is properly tolled while you are out of the country. However, I do expect that to change, so now might be a good time to cancel that ten-year hiatus to Cancun. As the IRS is now sharing databases with US Customs and Homeland Security, my guess is that shortly — with all of the recent focus on international compliance — the IRS will soon be able to stop the clock until you pay the debt in full or come back to the US.
The IRS can always convert your tax debt into a civil judgment that has no statute of limitations
And before you get "too smart by half," it's important to understand if the IRS thinks you are getting too cute with avoiding repayment due to a soon-expiring statute of limitations, they can always file a suit in Federal District Court to convert your Title 26 tax debt into a regular civil judgment, one which has no statute of limitations. At this point, due to the rather sizable resources being expended by the IRS in filing this lawsuit, you can be pretty confident that they are not looking at you too favorably.
Understanding the CSED is necessary
Knowing how long the IRS has to collect back taxes is essential to finding the best possible resolution for your individual case. If your statute is close to expiring, the IRS may get even more aggressive because once the window to collect back taxes has expired and no lawsuit has been filed, the taxes are gone! While tax liens may still remain filed, they are self-releasing, or otherwise known as stale-dated; this means that they become of no effect.
If your collection period is long or hasn't started yet, it is essential that you find a solution that makes the statute of limitations irrelevant — something along the lines of Chapter 7 bankruptcy or an offer in compromise. Alternatively, do something that at least gets the collection clock moving like hardship status, a partial payment installment agreement, or a regular installment agreement.
The last thing you want is to take an action that helps the IRS by tolling the statute of limitations. More time on the clock means less power for you at the bargaining table. While options like a solid offer in compromise or filing bankruptcy are more than capable of resolving a tax debt, having the negotiating edge of a soon-to-expire CSED is something that can be used to staggering effect. By tolling the clock, you're allowing the IRS the ability to collect sometime in the future when, theoretically, you are more likely to have the resources to pay them in full.