I recently had a conversation with a new client. She was looking at ways she could raise some money to pay her IRS debt off. There was a lien on her house. Her credit had been impacted, and not in a good way. And she couldn’t refinance her house.
She felt stuck.
“And it will never be done!” she cried. “My bookkeeper hadn’t paid the taxes she said she did. I owe over $100,000 and I can just afford $200 per month.”
A few more questions later, and we ascertained that the IRS had actually agreed that it wasn’t completely her fault that the taxes hadn’t been paid. That meant the penalties were nowhere near as bad as they could have been.
Taxes and interest were still due though. And the interest kept compounding. In fact, a quick calculation looked like her $200/month payment didn’t even pay the interest on the debt. It was growing faster than that.
Was this a debt that she’d have forever, just like she feared?
That’s when I explained the statute of limitations for IRS debt to her.
The 10 Year Statute of Limitations for IRS
The IRS has 10 years after the date of assessment to collect on delinquent taxes and tax-related fees. There are a few exceptions, including one that the taxpayers screw up on themselves. They actually open the door for the IRS to keep chasing them.
In most cases, the statute of limitations begins the date that an installment agreement is agreed upon. The closer you get to that 10-year period, the more aggressive the IRS will be, trying to get you to pay up or voluntarily extend the period.
If you hadn’t filed a tax return, the IRS will require you to prepare one or file one on your behalf (which you NEVER want). If the return is after the installment agreement has begun, the later date starts the 10-year period.
Suspensions That Lengthen the 10 Year Statute
If the IRS can’t collect for any period of time during the 10 years, that period of time is added to the statute.
For example, if you file bankruptcy and the court issues a stay for a period of time, that length of time will be added to the 10-year statute. If other actions are taken with the IRS such as a new installment agreement, an offer in compromise or innocent spouse relief.
You May Voluntarily Extend the 10 Year Statute of Limitations
Prior to 1998, the IRS pressured individuals and actually threatened them to waive the 10-year period. However, that practice was made illegal in 1998.
However, there are still some creative ways that the IRS may attempt to get you to agree to an extension. Read the fine print on your installment agreement. You may have waived your rights to the 10-year limitations with the agreement.
If you did, worst case is that it’s been now extended to 16 years. Just don’t sign anything else without having an experienced CPA read it first. Typically, the IRS will offer to let you appeal installment agreements if you extend the deadline. But, why would you? You don’t need to pay anymore. Talk to an experienced CPA or tax attorney first.