The Collection Statute Expiration Date, often referred to as the “CSED”, is the maximum time period the IRS will look back to collect unpaid taxes. Similar to a statute of limitation, where anything beyond that date is off-limits, the CSED is 10 years from the date the tax was originally assessed. For example, if you filed a tax return for the 2018 tax year on or before April 15, 2019 and owed tax with that return, those taxes were deemed to have been assessed on April 15, 2020. The CSED date on any unpaid amounts would be April 15, 2029.
During that 10-year period, the IRS has many tools at its disposal to collect these unpaid taxes. For instance, the IRS can garnish a taxpayer’s wages, or levy their bank accounts. In some cases, however, the CSED can be extended beyond the normal 10-year period.
Extension or Suspension of the CSED
There are several reasons where a taxpayer or the IRS can extend or suspend a CSED, such as:
- Filing bankruptcy;
- Requesting a Collection Due Process Hearing to stop a levy or remove a tax lien;
- Court judgment – If the IRS files suit for the collection of unpaid taxes, the period during which the tax can be collected by levy can be extended beyond the 10-year period. However, the levy or court proceeding must have started before the 10-year CSED expires;
- Filing an extension;
- Taxpayer has lived outside the United States for a continuous period of at least six months;
- Military deferment – The collection of any income tax due before or during military service, may be deferred up to 180 days if ability to pay the tax is materially affected because of that person's military service. The CSED is suspended during the taxpayer's military service and for an additional 270 days afterward; and
- Taxpayer signs a Waiver – If a taxpayer signs a waiver provided by the IRS to extend the CSED, there can be an extension of up to five years. However, the taxpayer has a right to refuse to sign the waiver.
Collection Actions and the CSED
Where the taxpayer fails to file a tax return, the IRS may file a “substitute for return” or a substitute tax return on behalf of the taxpayer. Typically, the IRS will wait three years before filing a substitute tax return, as taxpayers are given a three-year time period to file returns. Like any other tax return, the 10-year collection deadline begins from the date the return is filed.
According to the IRS, the first notice a taxpayer will receive will be a letter explaining the balance due and a demand for payment in full, typically called a CP14 or CP161 Notice. The payment amount will include the amount of the tax, plus any penalties and interest accrued on the taxpayer’s unpaid balance from the date the tax was due.
If the taxpayer is unable to pay the balance in full immediately, the IRS may offer the taxpayer a monthly installment agreement. However, interest and late payment penalties will continue to accrue while the taxpayer makes installment payments. The taxpayer may also propose an offer in compromise, which is an agreement between the taxpayer and the IRS to pay a reduced amount in order to resolve the taxpayer’s tax liability. For more on installment agreements and offers in compromise, see our article: How to Settle Your IRS Tax Debt: Offer in Compromise (OIC) versus Installment Agreement.
If the taxpayer is in a difficult financial position such that they can’t pay any amount over and above the IRS’ thresholds for basic living expenses, the IRS can delay collection. In such a scenario, the IRS may temporarily delay collection by putting the taxpayer’s account in “currently not collectible” status until taxpayer’s financial situation improves. Prior to approving “CNC” status, the IRS requires the taxpayer to submit a Collection Information Statement (Form 433-F, Form 433-A, or Form 433-B) to prove the taxpayer’s financial situation. In addition, the taxpayer’s tax debts will continue to accrue penalties and interest until they paid in full.
If the taxpayer fails to come to an agreement with the IRS regarding how to satisfy their outstanding tax liabilities, the IRS will attempt to take other enforcement action. These include:
- Filing a Notice of Federal Tax Lien;
- Offsetting a tax refund to which the taxpayer is entitled; or
- Serving a Notice of Levy.
The IRS may file a Notice of Federal Tax Lien in the public records, which publicly notifies creditors that the IRS has a claim against all of the taxpayer’s property. Additionally, the Notice of Federal Tax Lien could appear on credit reports and harm the taxpayer’s credit rating. Once a lien arises, the IRS generally can't release the lien until the tax, penalty, interest, and recording fees are paid in full, or until the CSED has expired.
In the event that a Notice of Levy is served, the IRS may seize the taxpayer’s assets, including:
- Bank accounts;
- Retirement income;
- Social security benefits; and
The IRS may also seize property, including cars, boats, or real estate in order to satisfy the outstanding tax liabilities. In addition, the IRS can seize any future federal or state income tax refunds to apply against the taxpayer’s federal tax debt.
To ensure you are making the best choice in dealing with delinquent tax debts, contact The Wilson Firm today.