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Statute of Limitations for IRS Tax Debt

By November 17, 2021No Comments

Scenario one – You owe back taxes to the IRS, yet haven’t received any notice from the IRS yet. You’re waiting to hear from them before you set up a payment plan. Scenario two – You just received a notice from the IRS regarding money that you owe them in back taxes from a tax return that you submitted five years ago. Can they do that?

Since the IRS does have a statute of limitations that it must follow regarding tax debts owed by taxpayers, they can indeed go after back taxes, as long as it falls within the ten-year period. After ten years, they may not be able to come after you for that debt.

Want to know more? Keep reading as we discuss this issue in more depth.

What Is a Statute of Limitations?

Statute of limitations is a legal term that refers to just how long a debt holder, like the IRS, has to legally collect a debt that’s owed to them. Depending on the state, a statute of limitations for your state, a credit card company or other private business that claims you owe them money, has a limited amount of years to collect on that debt. If they don’t file a lawsuit against you during that period, the debt will expire when the statute of limitations is up.

The same is true of the IRS, only the period of the time is the same, no matter which state you live in. Basically, the IRS has ten years to go over your tax returns, make any corrections necessary (they’ll go things like fix your math automatically) and then send you a bill for your back taxes. If ten years go by without them noticing that you owe them this money, the debt will expire, and they can no longer go after you for it.

Without a statute of limitations, the IRS could decide to bill you in perpetuity for back taxes that you owe from decades ago. This would be time consuming and expensive for both parties involved, both you and the IRS, so thankfully, the ten-year limit is in place. With that said, there are a few exceptions to this that make it trickier to avoid having to pay your back taxes and wait until the debt expires.

The Assessment Date

When does the statute of limitations kick in where the IRS is concerned? They start the clock at the official assessment date for the return. This is generally April 15th of every year, also known as Tax Day. While you can submit your return earlier, this doesn’t mean that the clock starts ticking at that exact moment. Instead, no matter how early you submit your tax return that year, the assessment date is always the day that everyone’s taxes are due.

Why does the IRS do it this way? For one thing, it’s easier to track. If they had to track the date that everyone submitted their returns and count ahead ten years until the statute of limitations expired, they would have a lot on their hands. Since they are already very busy, this is just one less thing to worry about. In addition, since every taxpayer knows when Tax Day is, they also know when that statute of limitations begins counting down.

IRS Collection Procedures

Throughout the ten-year period that the IRS has to collect the taxes that you owe them, they’ll make a number of different efforts to collect that money. They send out several notices, starting with a notice informing you that you owe them back taxes. This notice includes information about how much you owe. It also informs you of the tax year in which the debt has accrued. Also included is information about how to contact the IRS if you have questions, as well as how you can pay the debt. There are several different methods, including check or money order sent through the mail, as well as bank drafts and credit card payments online.

If that first notice is ignored, they will send you others. If you have a tax refund owed to you from the current year, the IRS may choose to keep that money and apply it to the back taxes that you owe. Over time, their efforts will get more and more threatening, as they can legally garnish your wages, put liens on your home, business, and other property, and even prevent you from renewing or using your passport, driver’s license, and professional licenses. If you owe enough in back taxes and refuse to pay it, they may even threaten you with jail time.

However, despite all of these threats, anything short of a court filing (which is required for garnishments, liens, and license suspensions) may go away once the statute of limitations is up. They have a ten-year period to attempt to collect the money that you owe them, after all.

Extending the Statute of Limitations

With all of that said, if the IRS files a legal suit against you, the statute of limitations no longer exists. They can continue to insist that you pay them the money that you owe in back taxes, and they can keep garnishing your wages and placing liens on your property. In fact, if you continue to avoid the IRS even after they have placed liens on your property, they can seize your belongings and auction them off to recoup the money that you owe.

In addition, you can extend the statute of limitations on your own, as long as you give the IRS permission to continue their collection efforts. Prior to 1998, the IRS used some underhanded techniques in order to get taxpayers to agree to this. Thankfully, a law passed that year that made this particular part of the process illegal.

Filing For Bankruptcy While Owing Back Taxes

There are other things that can be done in order to extend that ten-year statute of limitations as well. For example, if you file for bankruptcy, the IRS must stop all of their collection efforts. The clock on the statute of limitations stops until your bankruptcy proceedings are done. Although most bankruptcies won’t take care of your IRS debts, some may, so you might not end up owing that entire amount to the IRS once your bankruptcy is complete.

However, if your IRS debt is not a part of your bankruptcy at all, the statute of limitations clock will start up once again once your other debts are discharged. This means that whatever amount of time that was left on the statute of limitations when the bankruptcy was filed will still be there once the bankruptcy suit is complete.

Installment Agreements

Another method that the IRS uses to extend the statute of limitations is getting you to agree to an installment agreement. When you set up a payment agreement with the IRS, they automatically stop the statute of limitations, and add six years onto the period, making it a total of 16 years in all, not just ten. This is due to the fact that most IRS installment agreements are six years in length, although this depends on many factors such as the total amount that you owe and the amount that you can pay the IRS monthly.

The statute of limitations remains in place during the installment agreement, just in case you fall behind on payments or cannot make them on a regular basis as required. It allows the IRS to continue their collections efforts in these situations.

Note that the closer your tax debt gets to the ten-year statute of limitations, the more that the IRS will attempt to contact you in order to get the money that they are owed. There are plenty of examples where the debt was in months of expiring, only for the IRS to convince that person to enter an installment agreement and pay the debt, as the taxpayer who owed the money didn’t realize that it was about to expire.

The Statute of Limitations

No matter what, the statute of limitations is there for your own protection. While it’s always a good idea to see a tax professional and work on paying off your back taxes, the debt will indeed expire after the ten years are up. The IRS has to follow the law.

Contact Us Today

If you recently received a notice from the IRS regarding back taxes that you owe them, are worried about hearing from the IRS that you owe taxes from several years ago, or are wondering about the statute of limitations in general, then please reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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