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Waiting It Out: What You Need to Know About IRS Collections

Aug. 4, 2022, 8:45 AM

“Can I wait the IRS out?”

It’s a question I hear quite a bit from taxpayers—and one that, as a tax professional, I’ve discussed with clients. It’s not an easy answer, despite ads that suggest that they can calculate your exact end date by looking at your tax bill. (Spoiler alert: It’s not that easy.)

It may be tempting to jump straight to the collections piece when thinking about paying up, but that’s only half of the story. There are two parts to settling up with the IRS: assessment and collections.

Assessment

An assessment is the official record of your tax debt—you can find this date on a tax account transcript. An original assessment may be recorded shortly after you file. However, the statute of limitations for assessment, including additional tax, is generally three years from the date you file or the return is due, whichever is later. Filing an amended return will not ordinarily change the statute of limitations.

The statute of limitations can extend to six years if you omitted more than 25% of your gross income from your return. If you file a false or fraudulent return with the intent to evade tax, the statute doesn’t run at all: That means the IRS has an unlimited amount of time to assess tax. Ditto if you fail to file a return.

But be careful: If you fail to file your tax return, the IRS can assess tax under its Substitute for Return (SFR) program. If the IRS files a return for you under the program, the three-year statute doesn’t run—the IRS can assess tax at any time. But if you file your tax return, a three-year time limitation is set, and the IRS can assess tax during this period.

You can also extend the time to assess by signing a statutory waiver or extension agreement. You can find out more about waivers—and whether to sign one—here.

Paying Up

After you file your tax return, if you owe any tax and don’t pay up, the IRS should send you a bill for the amount due, including any additional tax, penalties, and interest. Not getting a bill in hand isn’t a pass—you still have to pay. And remember, even if you don’t file a return, the IRS can assess tax through the SFR program.

Once tax is assessed, the IRS has 10 years from that date to collect. That leads some taxpayers to believe that it’s a finite 10-year window. It’s not.

The IRS can hit pause on the collections window, extending the time they have to collect, if you meet certain criteria. Those include:

  • Submitting an Offer in Compromise. The IRS will stop the clock while the agency considers an application for an Offer in Compromise. If the request is rejected, collections will be suspended for another 30 days, plus any time the Appeals Office considers an appeal.
  • Applying for an Installment Agreement. The same collection rules apply to Installment Agreements as Offers in Compromise.
  • Requesting Innocent Spouse Relief. If you request Innocent Spouse Relief, collections will be suspended from the date of your request until 90 days after a Notice of Determination is issued. If you file a timely petition with the Tax Court, collections will be suspended until 60 days after the Tax Court’s final decision. If you appeal the Tax Court’s decision, the collection period will begin 60 days after the appeal is filed, unless a bond is posted.
  • Asking for a Collection Due Process hearing. Collections will be suspended from the date of your request until a Notice of Determination is issued, or the Tax Court’s decision is final.
  • Bankruptcy. There’s an automatic stay if the tax periods subject to collections are included in a bankruptcy. Collections will stop for the time of the stay, plus six months.
  • Extended stays. If you live outside the US continuously for at least six months, collections are suspended while you’re outside the US.

Figuring Out the End Date

It can be tricky to figure out the time remaining if a taxpayer has been subject to one or more of these actions. As a tax practitioner, I can attest that I often see the taxpayer after they’ve submitted several Offers in Compromise or requested other relief. Even with a transcript, making the exact calculation can be difficult. Add in an IRS backlog and difficulties processing returns, requests for relief, and petitions, and it can be nearly impossible.

If you’re not sure how much time is remaining, you can call the IRS and ask. Obviously, the call could put IRS on notice that you’re aware of the amount owed, but in some circumstances, it may be the most effective way to ascertain how much time is left.

Once you have the end date, there are some serious considerations ahead. These are discussions that I have with my clients before they make the decision to write a check, enter a payment plan, or roll the dice.

Can You Afford to Pay if the IRS Catches Up With You?

The premise of waiting it out, of course, is that you hope you’ll reach the end of the collections period before the IRS takes action. If you’re successful, that’s a win. But if you’re not, the IRS will want to be paid the tax due, with penalty and interest. If the remaining window is narrow, the agency could be more aggressive in its collection tactics and less amenable to settlement options.

Is There Any Value in Stepping Up Early?

While some penalties—as well as interest—may be statutory, it’s also clear that some penalties are discretionary. A taxpayer who has been found to have purposefully dodged payment may open the door for additional penalties—and less grace. If the mitigation of penalties is important, it can make for a more compelling story for the taxpayer to have come forward first. And some options like certain amnesty programs may be limited if the IRS seeks you out, as opposed to the other way around.

It has generally been my experience that most tax authorities, including IRS, are easier to work with if the taxpayer comes forward first. Your mileage may vary.

Have You Thought About State and Local Taxes?

Even if the IRS runs out of time, localities and states may be able to keep chasing. In my own state of Pennsylvania, there wasn’t a limitation on collections until recently. In 2019, Gov. Tom Wolf (D) signed a piece of legislation into law that (finally) establishes a 10-year statute of limitations on collecting Pennsylvania state tax liabilities.

When planning for a resolution, check collection statutes for state and local taxes, and wrap that consideration into discussions about the ability to pay.

Are You Sleeping at Night?

I’m not kidding. I have clients who are incredibly anxious about owing the IRS—it keeps them up at night. Even if the facts could support waiting, don’t discount the value of a good night’s sleep by resolving the issue now.

Think Big Picture

Tax can be a numbers game. But it doesn’t start and stop with numbers. Don’t fixate on the date a return was filed—look at the whole process from start to finish, and fill in the gaps where necessary. Ask questions. And have important discussions. You’ll be glad you did.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com