“Do IRS problems go on forever?” The short answer is no, not necessarily.
It’s a little known fact, but there is actually something called a collection statute of limitations. It’s also known as the Collection Statute Expiration Date (CSED). Now, the collection statute expiration date is 10 years from the date of the assessment of the tax.
Now, what does mean in English? Well, a tax is assessed either on April 15th, the due date for normal returns or – we’re talking about income tax here, the 1040 returns – April 15th or the date that the return is filed, whichever is later. So if you file your return on March 2nd and you owe tax, then it would actually be assessed on April 15th because April 15th is actually later than March 2nd, but if you filed your return on May 15th instead of April 15th then it would be May 15th of that particular year, if that makes sense. Now, that’s just actually the simple answer; there actually can be multiple assessments for a given tax year and you might ask yourself how does that happen? How is that possible?
Let me give you an example. If you file your return on time on April 15th and you show a refund due for example, there is an assessment of tax but most likely you have paid in enough tax and so there isn’t a tax bill.
Let’s say you get a friendly little audit notice from the IRS a year and a half later and then they go through the audit, they have you bring in your shoeboxes full of returns or receipts, and eventually there is a new assessment, so there is additional tax due. What happens then? Well, then there is a new assessment and the 10 years runs from the date of that assessment. So you can actually have multiple assessments, so you can have multiple collection statute expiration dates.
Let me see if I can make that a little clearer for you. If you owed tax on – let’s say you filed on January 1, 2006, and then there was an audit on January 1, 2008, your statute expiration dates for the first would be December 31, 2016, and the second and subsequent one would be December 31, 2018 – something like that. Anyway, you get the idea; 10 years for each additional assessment.
If you have never filed a tax return, then the IRS will prepare one for you, that’s called a Substitute for Return. It’s legal under Internal Revenue Code Section 6020(b). The IRS will prepare a return for you, and the collection statute expires 10 years from the date of that assessment.
Now, back in the old days – maybe even 5 or 10 years ago, this was unclear. We all thought in the IRS Problem Resolution Community that there was no statute of limitations on Substitute for Returns and the IRS Council has subsequently cleared that up for us. There is definitely a collection statute expiration date for Substitute for Returns.
The interesting thing – if you’re into this kind of thing, this kind of trivia – is that although there is a collection statute expiration date, there is a 10 year statute limitations on the Substitute for Return, there is no assessment statute of limitations, which means they can continue to assess additional tax well beyond the 10 years, even though the normal assessment statute date is only 3 years. Hopefully, that didn’t confuse you. I’ve only seen that happen in very rare occasions and I don’t think it’s something you need to trouble yourself about.
It’s not uncommon for the collection statutes to occur well after the 10 years is due or has elapsed. Let me give you some examples on how that might happen.
If you didn’t file a return and the IRS prepared a Substitute for Return for you four years late, then the statute of limitations isn’t going to run for 14 years. If you had filed them on time, they’d be up in 10, but because the IRS filed for you and they filed four years late, then the statute didn’t expire for a total of 14 years.
Now, there’s a number of things that could actually extend the collection statute of limitations, things like offers in compromise, innocent spouse petitions, tax court petitions, different administrative appeals within the IRS, and so on; bankruptcies as well. So in order to know for sure when your collection statute of limitations has expired or has elapsed, you’re going to want to make sure that you contact a qualified tax professional to take a discreet look and see if your statutes have expired.
We use the Freedom of Information Act request. It is somewhat akin to asking the librarian for information in the library. That used to be a whole lot better example before the Patriot Act and 9/11, but we haven’t seen a correlation between asking for transcript information by the Freedom of Information Act from the disclosure office to trigger any kind of collection action whatsoever.