What is the Statute of Limitations on Tax Debt?

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  • A statute of limitations exists on tax debt, after which the IRS cannot recover back taxes.
  • If you’re considering exercising a statute of limitations, you probably need tax debt advice.
  • It’s wise to face up to your responsibility for tax debt.

If you have a tax debt that is past due, the IRS will attempt to collect on the money that you owe. Whatever your reasons for being past-due, the government has several options for recovery. They can impose a levy or lien on any income you receive or seize property you own.

By law, the IRS has a finite period of time in which to collect the money, a time period known as the statute of limitations on tax debt. This period is generally 10 years, but the statute of limitations can be extended under certain circumstances.

What is the Statute of Limitations on Tax Debt?

The Statute of Limitations on Tax Assessment

The 10-year rule for the collection of taxes can be misleading, as that time doesn’t start until the IRS assesses your tax liability and sends you a bill. If you fail to file a tax return, the IRS can file a substitute return and create a deficiency assessment, but the agency may not do so for up to three years after the due date.

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In addition, if you omit a substantial amount of gross income on your return, the time the IRS has to assess your taxes gets extended to six years.

How Can the Statute of Limitations Be Suspended?

The statute of limitations can be suspended by certain actions that you, the taxpayer, takes. The suspension period can extend from a few months to several years depending on your case. Any period of suspension will be added onto the 10-year statute of limitations. Actions that lead to suspension of collection proceedings include the following:

  • Requesting an installment agreement will cause the statute of limitations to be suspended from the date the IRS receives the request to the time the agency makes a decision. If the request is denied, an additional 30 days of suspension will allow you to appeal the decision.
  • Submitting an offer in compromise results in suspension for the same period as an installment agreement request.
  • Asking for a collection due process hearing within 30 days of receiving a final notice of intent to levy will suspend the statute for the duration of the pending hearing.
  • Requesting innocent spouse relief suspends the statute of limitations until the final decision of the tax court plus an additional 60 days occurs.
  • Living outside the United States for six consecutive months or more leads to suspension for the duration of your absence. This suspension will continue for six months after your return to the United States.
  • Serving in the military will get the action suspended for the duration of your service plus 270 days. If your service was in a combat zone, an extra 180 days will be added.
  • Filing for a taxpayer assistance order can be done when you have received a notice of a tax levy or lien that will cause you extreme hardship. The statute of limitations will be suspended while your case is being reviewed.
  • Filing for bankruptcy results in the court issuing an automatic suspension for the tax periods involved in your bankruptcy plus an additional six months. In this case, you want to understand when the suspension ends.

The IRS will rarely sue you for the collection of taxes due, but in this event, the statute of limitations would be suspended during this action. This suspension would also be the case if you were in litigation with the IRS.

Can You Voluntarily Extend the Statute of Limitations?

You can voluntarily agree to extend the 10-year period of the statute of limitations under certain circumstances. An extension would usually be for five years.

  • If you are struggling to pay your back taxes, but you are expecting to receive assets after the statute of limitations expiration date, you can agree to an extension as part of a tax resolution.
  • The IRS may approve a partial payment agreement if you agree to extend the date to enable collection of your debt.

In these cases, the statute of limitations will end 90 days after the expiration of the extension.

What Are the Penalties for Late Payment of Taxes?

The IRS can impose penalties and interest fees if you are late filing your tax return, make a mistake, or if you don’t pay the full amount of tax due. What fees you incur will depend on how late you make payment or the severity of the errors, but they could include the following:

  • If you file on time but don’t pay the total, you will be charged one-half of 1 percent of the tax for each month you owe.
  • If you file late, you will pay 5 percent of the tax owed for each month overdue.
  • Combined penalties are applied if you file late and pay late.
  • The federal short-term rate of compound interest will be charged, plus 3 percent.
  • Filing a frivolous tax return incurs a penalty of $5,000.
  • Mistakes will result in a fee of 20 percent of the underpayment.

Missing, False, or Fraudulent Tax Returns

In cases where the IRS can determine that you have willfully failed to file your tax return, or you have done so fraudulently, no statute of limitations will be applied to the collection of your debt. Furthermore, if the IRS chooses to prosecute you, you could face severe penalties and possible time in jail.

Consult Solvable

In nearly all cases, it is far better to face up to tax debt and contact the IRS voluntarily to find out if you can come to an arrangement to settle the tax debt that you owe.

If you are worried about getting into debt with the IRS, or you’re already in the situation where the IRS is trying to collect back taxes from you, you should consider inquiring about professional debt advice from Solvable. We provide assistance by matching your needs with trusted debt relief providers that can help you with your debt concerns. Learn how our resources and knowledge about debt relief could help you get out of debt faster.

 

Graham Snelgrove
Author:
Graham Snelgrove
Graham Snelgrove is an English freelance writer who has had many articles on a wide variety of subjects published online and in print, including in Yachting Monthly, a Time Inc. publication. He currently lives on the Spanish island of Lanzarote in the Canary Islands.

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