Many Americans believe that the IRS debt is a lifetime debt and that tax collectors can drag them to the grave. Fortunately, that’s not the case! There is a statutory time limit that limits the ability of the IRS to examine and collect taxes. Taxes do expire at some point and in many cases the IRS does not get the money they are legally entitled to collect.
Basically, the IRS has 10 years from the date they submit their first bill to collect taxes. Federal tax collectors must get the cash before time runs out. The 10 Year Rule does not apply to state taxes because each sets its own laws.
For tax assessments made after November 5, 1990, the IRS may not collect taxes after 10 years from the date of the tax assessment in no special circumstances. If you’ve never filed a tax return, there is no IRS statute of limitations that requires you to file, but as a policy, the IRS generally only requires non-reporters to file the last 6-7 years. If the IRS files for you by making a Substitute-for-Return (SFR), they have 10 years from the date they filed the SFR to collect from you. If a Federal Tax Lien (FTL) is on file against you, it expires and becomes void if the underlying statute expires. A person can find out when the law expires on a tax bill by requesting a Record of Accounts (ROA) from the IRS for each tax year you owe.
The 10 Year Rule does not apply in all situations as there are exceptions based on special circumstances that can extend the law. This is:
1. Bankruptcy where taxes are not fully paid. The bankruptcy filing extends the statute at which the bankruptcy is pending plus 6 months.
2. Warrant for Mentoring Husband and Wife and Innocent Taxpayers. This extends the statute as they hold the IRS Collections Division from law enforcement action.
3. Billing Due to the Appeal Process. The ability to file a Collection Due Process Appeal (CDP) is a powerful right in the fight against IRS levies or foreclosures. If filed in time, it extends the law because it also hinders enforcement.
4. Voluntary Waiver. Execution of voluntary waivers by taxpayers to extend statutes is rare these days because the IRS doesn’t often pursue them. In the past, before the Bill on the Rights of Taxpayers II, this was common. The IRS has not enforced the old waiver since then and the new one is limited to 5 years.
5. Lawsuits to Reduce Tax Liability against Judgment. The IRS can sue to extend the statute by judgment through the Department of Justice. It’s also quite rare.
6. Offer in Compromise. An offer is a settlement proposal and once submitted, if the IRS considers an offer, it extends the statute while it is under review. If approved and taxes settled, the IRS FTL is released and the tax assessment adjusted. However, if rejected (and more than 60% rejected), it results in more time for the IRS to collect.
The law on refunds is 3 years from the due date for collecting your refund. If you apply 3 years or more after the due date, the refund is lost. In some cases it may be possible to pursue a refund beyond three years. If you pay taxes, you can claim a refund within 2 years of payment. If your claim relates to bad debt or worthless collateral, you have 7 years to file a claim.
The flip side of the 3-year refund rule is that the IRS only has 3 years to examine returns filed through an audit in most cases. Now, the tax code is complicated and there are exceptions to this rule. If you have committed fraud or tax evasion, there are no laws for auditing. There is also a 6 year rule for audits in cases of “substantial loss” of 25% or more of revenue. But for most people, the three-year statute will apply to audits.
If you have serious IRS debt, get serious help from a CPA, EA, or Lawyer who focuses on this matter. Don’t rent nightwear from late-night TV commercials or sharp radio commercials.