What is the IRS Statute of Limitations on Debt?
Summary: If the IRS is trying to collect taxes from you, you may wonder how long they can try to collect. Here's what you need to know about the statute of limitations on IRS debt.
The IRS, like the Wizard of Oz, is great and powerful. But what happens if you take a peek behind the curtain?
You’d see that their power has limits.
It’s called the IRS statute of limitations.
But what does that mean?
A statute of limitations on IRS debt means the IRS can’t try to collect their money forever.
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The bad news is that it takes 10 years for the statute of limitations to run out on IRS debt.
The IRS lifts 10 year statute of limitations and at that point you no longer owe the IRS any more back taxes.
The good news is that, at some point, you’ll be off the hook for good.
Because even if the IRS put a lien on your property, they don’t have a lifelong claim. “The lien expires when the IRS statute of limitations on collection expires,” said Canopy Tax.
Want to know more?
Let’s dive in.
When Does the Statute of Limitations IRS Start?
To know how long the IRS will knock on your door, you need to figure out when the statute of limitations begins.
“Generally, the IRS statute of limitations on collections for the IRS to collect past-due tax is 10 years after the IRS has assessed a tax liability,” according to Canopy Tax.
So the question is:
When does the IRS assess a tax liability?
Because that’s when the clock starts ticking.
If you file a tax return but don’t pay the amount you owe in full, the IRS will send you a bill. Check the date on that bill – that’s day 1 of the IRS lifts 10-year statute of limitations.
A word of caution:
Don’t try to get out of it by not filing a return.
Because the clock will never start.
Even if you owe money and you can’t pay, tax experts recommend filing a return.
Because if the statute of limitations IRS doesn’t start, it can’t end.
And you don’t want this hanging over your head forever.
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Hitting the Pause Button on the IRS Audit Statute of Limitations
There are a few exceptions to the IRS 10-year statute of limitations because certain conditions can stop the clock.
It’s called “tolling the statute of limitations.”
How does that happen?
You hit the pause button on the time clock if you:
- File bankruptcy
- Submit an offer in compromise
- Request an installment agreement
- File an appeal
- Sue the IRS
- Leave the country for at least 6 months
- Are put on qualifying active military duty
While you might think an offer in compromise (OIC) can help you reduce or get rid of your tax debt, it might be a terrible idea.
According to Canopy Tax:
“It is not uncommon for Offer in Compromise cases to take from a year to a year and a half, and if the statute of limitations on [your] debt is upcoming, you may not want to make an OIC that extends that timeline.”
What that means is, if you’re close to the end of your 10-years, an OIC pauses the collection period.
The same goes for requesting an installment agreement.
Once you start an installment plan, you will have a harder time qualifying for a debt reduction request later. We recommend you speak to an expert to see if you qualify for tax relief first.
Before you make any decisions regarding your tax debt, consult with a tax debt relief professional.
What if you don’t?
You could owe the IRS for a really long time.
The IRS Can Extend the Collection Period
Hitting the pause button can extend the collection period. But there’s one more way the IRS can legally collect from you for longer than the IRS back taxes statute of limitations allows:
If the IRS files a lawsuit against you.
Generally, the IRS will only sue you if they think there’s a good chance of getting their money.
For instance, if you have an inheritance coming or become eligible to withdraw money from your retirement account.
Basically, if you can get your hands on it, the IRS can too.
If that’s the case:
The IRS might file a lawsuit to extend the collection period beyond 10 years.
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What Are Your Options?
Waiting out the IRS collections statute of limitations isn’t a good strategy to avoid paying your tax debt.
The only way that might possibly work is if you don’t have any assets (no car, house, or anything else of value) and don’t have any income for the entire 10 years.
That’s a long way to go with no property or income.
As time ticks by, the IRS will generally get more aggressive in their collection efforts.
If you have tax debt, give yourself a break. 8% of all U.S. taxpayers are delinquent.
Setting up an installment agreement is the quickest way to get them off your back.
But it’s not always the best option.
An installment agreement temporarily stops the clock from tracking the statute of limitations on IRS debt.
It can also disqualify you from other tax relief options.
What should you do?
It’s best to consult a tax professional.
You might be tempted to settle your tax debt on your own. But you also don’t want to get yourself into a bigger mess.
Make sure you understand your options, know what you’re signing before you sign it, and ask a tax debt relief company for help if you’re in over your head.
Get a free second opinion!
By Amy Beardsley
Amy is a personal finance expert and freelance writer and owner of Early Morning Money, She has bachelor degrees in business administration and legal studies, and her work has been featured on The Huffington Post, Money Tips, and many other personal finance publications.