IRS Tax Debt Statute Of Limitations: Does One Exist?

Well, I've got some good news for you! If you're afraid that the IRS will be after you for the rest of your life, you can breathe a sigh of relief. Contrary to what many people seem to believe, the IRS only has a limited window of time in which they can collect. The saving grace of a substantial number of taxpayers is the CSED (Collection Statute Expiration Date).


The CSED provides an ending point to the IRS's reign of terror in your life. Ten years from your assessment, the CSED kicks into place and makes it so the IRS can no longer collect from you. While some people are able to — and should — remove the IRS from their life through an offer in compromise or by setting up a reasonable installment agreement, the CSED can be the perfect solution for others who can't afford either of those options. 


Does the CSED mean that all someone needs to do is wait ten years and then they can wash their hands of the IRS as their tax debt vanishes in a cloud of smoke? Yes and no. Unfortunately, nothing with the IRS is ever that easy. The IRS and the IRM (Internal Revenue Manual) are two of most complex creations in the history of the world and they like to make things tough for taxpayers. However, that doesn't mean that you can't use the CSED as a very real means of resolution or a killer bargaining chip. When dealing with a tax problem, it's important to know the little details so you can benefit from them while avoiding the pitfalls all along the way. 


In order for the statute of limitations to begin, the clock must be started with an IRS assessment; if there has been no assessment, the clock can't run.


An IRS assessment sets the clock in motion

In order to get the statute of limitations ticking, you need to have an assessment and assessment date. Being able to show the IRS that this is the day that you were first assessed is the key to using the CSED for a great resolution. But, it's also important to note that the opposite is true. If you don't file a return or get a bill from the IRS, the ten-year period has yet to start. That, my friends, means that the IRS has until the very end of the world to come after you. It's important to air your dirty (tax) laundry because once you set that glorious clock in motion, their power becomes finite.


The CSED is actually one of the simpler concepts in tax resolution. Ten years from your assessment, the IRS loses their legal ability to collect from you. So, as an example, let's say that the year is 2009. You've filed your tax return normally, but you owe the IRS $45,000. You didn't file your return until April of 2010 though, so — instead of starting assessment in 2009 — the CSED clock starts ticking in April of 2010. Using these dates, your debt will not be wiped clean until April of 2020. Is that a long time to wait for your freedom from the IRS? You bet. But, in certain cases, you can save yourself significant amounts of time, money, and energy while still having having an awareness that the IRS will eventually leave you alone.


Like everything about the IRS, there are always caveats. There is always a "but" that can trip you up if you aren't paying attention. While the CSED starts from the date of your initial assessment, there are certain actions which will stop it cold. The points where the clock is stalled are what tax professionals and the IRS refer to as "tolling" the clock. When you stop engaging in these activities, the clock will start up again. Some of these actions might be entirely logical, but there's always some that can catch you by surprise. 


Putting the CSED on pause

Leaving the United States: If you leave the United States, the CSED clock stops running. For anyone that's thinking about running away and hiding in another country until their debt expires, you better think again. The IRS has some absurdly long arms that reach around the entire globe. Running from your tax debt allows the IRS to suspend your debt and move that "Thank-God-it's-over" moment even further into the future. As far as I know, traveling to another planet — i.e., Mars — doesn't seem to stall the CSED clock. Maybe that's a good option for having a nice vacation while keeping that clock running!


Filing Bankruptcy: If you file any type of personal bankruptcy, the CSED statute of limitations is put on pause for as long as the bankruptcy is open. For Chapter 7 bankruptcies, we see the average tolling period tends to be between 6-9 months. However, for Chapter 13 bankruptcies, sometimes the statute of limitations will be tolled for years. Bankruptcy can be a real option for wiping out tax debts, but be wary that it can also have an effect on your CSED. Talking with tax and bankruptcy professionals is going to be your best bet in deciding what's the best strategy for your particular situation.


Filing an Offer in Compromise: Offer in compromises are tough; unless it's a reasonable offer, you can bet your bottom dollar that the IRS is not going to take you seriously. That being said, they will always encourage you to file an offer. But, just because you're filing based on their recommendation, don't mistake their encouragement for certainty. Even if an offer in compromise is entirely reasonable, the IRS has zero obligation to accepting the offer you put forward. With that in mind, there are three primary reasons that the IRS wants you to file an offer in compromise:

  • First, they get to take a look at all of your finances and find out what to levy if they don't accept your offer. They're able to consider the assets and expenses you've listed under your submitted 433-A or 433-B collection information statement.
  • Second, they get to keep your down payment and there's nothing the IRS loves like free money (there are ways to limit your down payment, but the IRS won't tell you about them).
  • Finally, while your offer in compromise is pending, the CSED clock is tolled. We have seen cases where taxpayers have repeatedly filed offer after offer, only to be rejected and learn that the IRS still has a whole lot of time to collect. It almost makes you wonder if they reject offers with extending the CSED in mind… This is why my firm only files an offer in compromise if we thinks there's a strong chance for it to be accepted.


If you find that you are nearing the end of your CSED, it can often be better to attempt to negotiate an installment agreement or work your way into currently non-collectible status, as either one of those solutions keeps the CSED clock ticking. Chances are that you're going to have to pay something, but we're going to do everything we can to make that number as small as possible.


While the above are some of the most common reasons for a suspended CSED, there are other actions that can have an impact as well. Making a mental note of the ones that might apply to you in the future is a great way to be ready for whatever the IRS throws at you.


Not everyone likes the CSED

Be wary about where you get your information about the CSED. The IRS has a real fondness for holding on to power, so letting them know you're of your taxpayer rights and options is a surefire way to put them on their toes; they understand that the more you know, the less power they have. If you ask them directly, the IRS can sometimes be a bit coy about the expiration date for collection. The exact date can be found out through accessing the IRS's Integrated Data Retrieval System (IDRS), but account transcripts can be an absolute nightmare to sort out. Oftentimes it takes a trained tax resolution expert to sort out the details. Like I said before, the IRS is not known for making things simple and straightforward. 


If you do ask an IRS employee when the CSED is, don't be surprised if they have absolutely no idea what you're talking about. The IRM (Internal Revenue Manual) is an enormous book full of dense material, and it's not likely that the majority of employees are aware of even half of the topics it covers. While I hold a strictly anti-IRS worldview, I firmly believe that a significant number of IRS employees are criminally overworked and wildly underpaid. If they are unaware of the CSED, it's an excellent teaching opportunity to make sure that they don't hurt taxpayers in the future.


Leading up to the end

Right before the CSED expires, the IRS often gets extremely aggressive. They understand that once the CSED is over — at least in the majority of cases — they're plumb out of luck. They won't be able to collect from you and that goes against the IRS's very real love for money. On one particular occasion, we had one hyper-aggressive Revenue Officer operate outside the bounds of the law by illegally levying a client's bank accounts. The IRS loves money, don't ever forget that.  


Life after the CSED

If you do successfully wait out the IRS, keep watch out for some nasty surprises:

  1. If a federal tax lien was filed against you, the tax lien will have become stale-dated (the "last day to refile" date is the date a tax lien will become of no effect). However, just because your tax debt has been wiped out, don't expect the IRS to help you out by releasing or withdrawing your tax lien. 
  2. The IRS can convert your tax debt into a civil judgment by suing you in US District Court. If this happens, the standard rules of civil judgments apply. Fortunately, civil judgment conversions are rare and usually only happen if a taxpayer is intentionally hostile or uncooperative with the IRS.


Expiration and Limitation

Being aware of precisely how long the IRS has to collect on a tax debt is absolutely essential for many resolutions. Being able to use the CSED as a bargaining chip can have incredible benefits, and if you are able to wait out the IRS, there is a possibility of significantly reduced monetary expenditure. That's the good news about the tax debt statute of limitations! But, as always, be careful when working with the IRS. They are clever and they can make your future very difficult if you fall into any of the pitfalls along the way.

If you find yourself feeling overwhelmed and running out of hope, contact us. We spend our lives helping people get their futures back. Keep your chin up and keep pressing on; it is going to be tough, but you'll make it out alive. And when you do, your future can be whatever you want it to be.