IRS Collection Limitations - John R. Dundon II, Enrolled Agent
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IRS Collection Limitations

IRS Collection Limitations

There are several options available through the IRS to resolve delinquent tax obligations and/or request relief.  One of the many reasons you need to be careful when engaging the IRS in these regards is because many of the programs including offer in compromise, collection due process appeal, and innocent spouse request extend the amount of time the IRS has to collect your delinquent taxes by the equivalent amount of time an application for relief is pending. It is hugely important to make sure the time frame for successful resolution of your tax matter is worth the risk of extending the IRS’ collection time capabilities.

Internal Revenue Code Sec. 6502 sets a limit of ten years from when the IRS puts a liability on its books referred to as the assessment date to pursue collection. This is technically called the Collection Statute Expiration Date (CSED) and will usually make most every IRS collection matter go away.

As stated above the filing of an offer in compromise will extend the statute of limitations on collection by the amount of time an application is pending plus thirty days. At present the IRS is taking at least nine to twelve months to complete an initial investigation of an offer in compromise. If the initial investigation results in rejection, an appeal can be submitted. This appeal process is currently taking twelve to eighteen months, sometimes longer. Generally speaking its best to expect the process to take twelve to twenty four months from the time an offer is submitted to approval (or denial). During this time the statute of limitations on collection is essentially suspended (aka carried over or ‘tolled’) because the IRS cannot levy or seize property during the investigation. Which means in plain english that the action of requesting tax relief automatically gives the IRS longer than the 10 years stipulated by statute to collect your delinquent taxes. The realities of success must be weighed against the risk of extending the collection statute.

The ability to file a collection due process (CDP) appeal is powerful because the IRS usually cannot begin enforcement action to seize property including bank accounts, wages, real and/or personal property until it provides notice and rights of due process. In most cases a CDP appeals hearing can last as long as eighteen months or more. Also a CDP appeal can even give Tax Court jurisdiction to intercede. Tax Court can take up to a year to issue a decision. While a Tax Court petition is pending the collection hold continues, as does the suspension of the collection statute.

Timely filed CDP appeals extend the statute of limitations on collection. This is important becasue a late-filed CDP appeal defined as filed within one year of the date of the Final Notice of Intent to Levy does not necessarily extend the collection statute expiration date but does entitle you to an appeal or ‘equivalent’ hearing as per IRS administrative practice via IRM and Treas. Reg 301.6330-1.

Although equivalent hearings are not absolute and are provided on a case-by-case basis, the IRS tends to process a late appeal and provide full appeal rights to the taxpayer’s benefit, including a hold on seizure and levy, while not extending the statute of limitations on collection.  Also Equivalent hearings do not extend the timing rules that make taxes eligible for a bankruptcy discharge. If bankruptcy is being considered, a timely filed CDP will ultimately prolong the time it takes to close a bankruptcy file, while an ‘equivalent’ hearing provides a hold on collection and no suspension of the bankruptcy timing regulations.

Although a CDP appeal presents a situation where late-filing with the Internal Revenue Service can potentially serve towards your advantage, it is important to understand that by late-filing a CDP appeal and requesting an equivalent hearing you lose the right to go to Tax Court to litigate the IRS Appeals’ decision.

Because the IRS will not consider the hazards of litigation in equivalency hearings consideration should be given as to the cooperative nature of the IRS revenue officer involved in the case who may pose many different problems ultimately requiring Tax Court intervention.

The filing of bankruptcy extends the statute of limitations on collection by the time the bankruptcy is pending, plus six months. If the bankruptcy is unsuccessful in eliminating the taxes, the IRS will have more time to collect afterwards. Time is also an essential component of eliminating and discharging taxes in bankruptcy.

Under Internal Revenue Code Sec. 6331(k) the IRS cannot take levy or seizure action while a request for an installment agreement is pending, for thirty days after denial or termination of an installment agreement, or during the time an appeal of a denied or terminated installment agreement is pending. When an installment agreement is in effect and not disputed, the statute of limitations on collection continues to run.

When entering into an installment agreement, the IRS can request that a taxpayer voluntarily sign a waiver extending the collection statute. This is rarely used but nevertheless is policy to request voluntary statute extensions in conjunction with partial-pay installment agreements and when an asset exists that will come into the possession of the taxpayer after the statute expires. AVOID IT!

Being out of the U.S. for a continuous period of more than six months also extends the statute of limitations on collection. This is reported via check box on IRS Form 433A Collection Information Statement for Wage Earners and Self-Employed Individuals.

If the IRS believes you are responsive in providing financial information the time the statute is extended will be generally limited to five years. If you are considered uncooperative and have not acted to resolve a liability, the collection statute will be extended for the duration of any collection potential.

Requests for innocent spouse relief and Taxpayer Assistance Orders both extend the statute of limitations on collection.

There are various ways to find out when the statute of limitation on collection is over:

1. call the IRS and ask for the CSED.

2. analyze IRS account transcripts to determine the assessment date and to add in any extensions of time reflected on the transcripts.

3. review the federal tax lien obtained at a county recorder or clerk’s office without contacting the IRS. A federal tax lien will list the date the IRS statute of limitations on collection begins (assessment), as well as the date thirty days after it would end without consideration for any extensions. Column (d) of the tax lien specifying the date of assessment is the key to determining when the collection statute expires: add ten years to it and you have the end date to the statute of limitations on collection. Be sure to account for possible extensions of the statute from this starting point.

When the statute of limitations on collections expires, IRS transcripts should have the following entry: TC 608, Statute Expiration Date, Clear to Zero. The account would be adjusted with a credit in the amount of the current outstanding balance. The result is an account transcript reflecting a zero balance due serving as testament that your tax debt has come to an end.