What “Tolls” the IRS’ 10 Year Statute of Limitation on Collection

ru9n9lWhen I speak with clients about the IRS’ 10 year statute of limitations and mention the word “toll”, I get the impression that people think I’m saying “troll”.  I understand the confusion.  The IRS is scary.

There are ways to challenge the monster however,  One way is to use the law that requires the IRS to consider a debt to be non-existent after 10 years…better known as the “CSED” or the Collection Statute Expiration Date.

The IRS has only 10 years from the date the debt is assessed to collect it.  That may sound like a long time, but the IRS can be slow and situations change.  As a result, many get rid of lots of tax debt as a result of the CSED.

Much to the IRS’ chagrin.

The problem for the taxpayer?  10 years isn’t actually 10 years.  Certain things stop the CSED from running or “toll” it.

The tolling list:

Leave the Country  If you are thinking about leaving the country for a few years to allow the clock to run…think again.  The CSED stops running while you are away.  You may ask – how will the IRS know that I’m gone?  It knows because it shares info with Customs and Homeland Security.

Bankruptcy Filing  The CSED is tolled while you are in the case whether a chapter 7 or chapter 13.  So if the debt isn’t discharged in the bankruptcy, it will be waiting and it will be waiting at the same spot on the clock as it was when you started. 

IRS Offer In Compromise  If you think the IRS collection department or the IRS Revenue Officer is encouraging you to file an Offer in Compromise because you are a good candidate for one,  you are probably mistaken.  Filing an offer allows the IRS to see all of your financial history and it stops the clock from running.  In the IRS revenue officer’s mind, your income may be going up while you wait for the offer to be rejected (the vast majority are) and he will be waiting at the end with the same amount of time to collect as when you filed the Offer.   IF you don’t have much time left on the CSED think twice before filing an offer.  You may be better off in an IRS payment plan that allows the clock to run while it is in place.

Collection Due Process Hearing Request  The IRS has to issue a “final” notice of intent to levy before it can hit your bank account and paycheck.  When it does an opportunity arises for you to appeal collection and propose alternatives like a payment plan or an OIC.   The problem with a CDP hearing request is that the CSED is tolled after it is filed and it continues being tolled until the hearing is over – which may be a long time if you use the appeal right to go to tax court.  If you file the hearing request late and it is treated as an equivalency hearing, the CSED isn’t tolled, but you still get to speak with appeals in most situations.

Installment Agreement Request  This is a strange one and I don’t think most people are aware of this, but while the IRS is considering your Installment Agreement Request…the CSED is tolled.

Fraud  You can’t defend a collection suit brought by the IRS by arguing that the CSED has run out if your own fraud prevented collection in the first place.  Interesting scenario to imagine.

Agreement to Extend – Rare

Someone Else has Your Stuff  The CSED is tolled when you things are in the control or custody of a Court, arguably someone else, and even by the IRS in some circumstances. (See Wrongful Seizure)

Should I use an Offer in Compromise to deal with my IRS Debt?

proper-preparation-prevents-presentation-predicaments-thumb-375x326-56592Should I use an Offer in Compromise to deal with my IRS Debt?

Unfortunately, misleading tax resolution advertising has resulted in a the widespread belief that an IRS Offer in Compromise is really just a matter of filling in some blanks on a form and mailing it in.  In reality, there are a several issues to think about before you should ask the IRS to settle the debt you owe.

Issue Number One – Is the IRS going to accept less than the full amount owed and consider the debt “settled”?

The IRS Offer in Compromise program is real, and for certain people it works pretty well.  For most people who try it, failure is the result.  The primary reason it only works about 30% of the time is that the IRS gets to determine what your “reasonable collection potential” (RCP) is.  It uses a formula to determine this RCP and in doing so it considers your past, present and potential income, your budget, what it believes your budget should be, as well as your assets.   It uses this RCP because it would rather settle with you and let you get on with your life… but it doesn’t want to settle for an amount that would leave money on the table before the statute of limitations period runs out.  The RCP allows the IRS to calculate whether the settlement you propose would leave money on the table.

The primary problem that the RCP represents to the taxpayer is that the IRS uses numbers to determine the budget which may be far less than the taxpayer actually spends each month.   Taxpayers don’t understand this and tax “relief” outfits tend to prey on ignorance in this regard in order to perform a little bait and switch.

Before filing an Offer, you should have someone with lots of experience with and understanding of how the IRS calculates budgets, income, and asset value review your situation and give you the real “low-down” before proceeding.

Issue Number Two – If the IRS revenue officer tells me to file an Offer in Compromise, does that mean I should?

The IRS Revenue Officer isn’t the decision maker.  An OIC department exists for the purpose of deciding initially whether an offer should be accepted.  A revenue officer has some good insight as to whether an offer will be accepted but they can and are often wrong.

A side-note – Many people are relying on the IRS Offer in Compromise Calculator to determine whether they should file an offer in compromise.  We don’t think this calculator is built for the purpose of actually giving you a good answer.  It will often overstate or understate your number.  Don’t rely on it.

Issue Number Three – There isn’t a specific percentage of tax owed that the IRS settles for.

The amount the IRS agrees to accept is primarily based on a formula and that formula uses your income, budget and assets: past, present and future to determine the amount.  The offer isn’t a disclosure form… it is a legal claim.  You will have the burden of proving that the amount you are offering is the RCP the IRS should base it’s acceptance on.  Every aspect of your claim is scrutinized and challenged.

Unfortunately tax “resolution” outfits tend to give off the impression that a specific percentage of the debt is standard across the board.  This is just a marketing technique.  Don’t be fooled.

 Issue Number Four – How do I know whether I should file an Offer in Compromise?

A lawyer, CPA or enrolled agent experienced in the Offer in Compromise business needs to review your tax debt, statute of limitations period, income, budget, assets and past/future income, budget and assets before an good estimate of what the IRS may accept can be determined.

There are a number of downsides to filing an Offer that have to be considered as well like:

  • You may be required to pay something to the IRS when the Offer is filed AND that money is lost if you lose.  
  • The 240 date required to accrue from the date a tax debt is assessed before a bankruptcy can discharge the debt is stopped by the Offer filing
  • The IRS statute of limitations on collection is extended, which has a potential negative effect on the RCP and will result in starting where  you began if the offer fails
  • There may be better options in terms of the elimination of the debt than an Offer in Compromise

Issue Number Five – Should I get help?

Some companies simply fill out the necessary documents and submit them.  If this is your company, it probably isn’t doing anything you can’t do yourself.  With some good explanation and education about how offers work, most consumers can handle a basic offer in compromise themselves.  More complex cases require help and that help should be provided by a firm that aggressively plans/argues these cases and has a high success rate.  (A high success rate is mostly the result of wise case acceptance)

We see many people who have used shoddy companies or who have done the offer or multiple offers themselves when their situation is complicated.  That hurts the ability to use other options and costs money and time.

How can we help?

We have analyzed, planned, prepared and filed many offers in compromise over the years.  We no longer file them as we think that there are many non-attorney firms that are capable of doing this work well and we believe that many people can do them as well with some basic guidance.  When we analyze a bankruptcy case we are also looking at whether an offer in compromise makes more sense than bankruptcy.  We tell our clients our findings and if the offer makes more sense, give them guidance re how to take the case forward.


9 Facts about Bankruptcy Every Tax Pro Should Be Aware Of

Tax pros should be aware of the following 9 facts about tax debt and bankruptcy.

Chapter 13 Bankruptcy can be a quick and more certain alternative to an IRS Offer in Compromise

A chapter 13 bankruptcy can be confirmed by the Bankruptcy Judge within 3-4 months after the case is filed and that confirmation will bind the IRS just like any other creditor.  The plan must pay any secured irs debt with interest, priority irs debt without new interest, penalties are treated as dischargeable debts, and underlying unsecured, non-priority tax debt may be dischargeable as well.

Debts that are discharged in a bankruptcy don’t “trigger” any cancellation of debt income

Debts that are cancelled as a result of a bankruptcy discharge do not get included in the debtor’s income.  Bankruptcy is the first exception on form 982 to the inclusion of forgiven debt in gross income.

The IRS and State Taxing agencies are subject to Bankruptcy Code’s Automatic Stay provision

Taxing authorities are stopped from taking any further collection action when a bankruptcy is filed.  Garnishments and Levies must end the moment the case is filed.

Tax debt can be wiped away by a bankruptcy filing

Tax debt can be treated as dischargeable if it is non-trust fund tax like income tax, the return was due including extensions 3 or more years before the bankruptcy filing, any late tax-payer filed return has been on file for at least 2 years (not true if the returns were filed late and you live in a 5th or 10th circuit state and possibly more circuits in the future),  there is no fraud or attempts to evade or defeat, and the taxes were assessed more than 240 days before the bankruptcy case is filed.

Tax penalties are dischargeable in bankruptcy

All tax penalties that are associated with a dischargeable tax are dischargeable, penalties are dischargeable in a chapter 13 even if the underlying debt isn’t dischargeable, and penalties related to non-dischargeable tax are dischargeable in a chapter 7 even if the tax debt isn’t, if the events giving rise to the tax are more than 3 years old.

A Bankruptcy “Estate” is created by a chapter 7 bankruptcy but not by a chapter 13 bankruptcy

A bankruptcy estate is created when the chapter 7 is filed and that estate is required to file a tax return and pay taxes on any capital gains it recognizes as profit.  The estate property remains property of the estate until the estate is closed or the property is abandoned.

Any tax attributes that belonged to the Debtor pass to the Bankruptcy Estate

The debtor’s basis, exclusions and loss carry forwards are usable by the Chapter 7 Trustee and only revert back to the Debtor when the bankruptcy estate closes.

Tax liens survive a bankruptcy case

A tax lien remains attached to any assets the debtor owned on the date of filing even if the underlying debt is discharged.  The lien doesn’t attach to any assets the debtor buys or acquires after the case is filed. In a chapter 13 case the lien is paid but only up to the value of the assets subject to the lien.

A debtor can elect a short tax year for the year a bankruptcy is filed

A short year election can make tax attributes available to the debt on the return for the pre-bankruptcy part of the year.  It can also help to verify the amount of tax due in the year of filing so that the debt becomes a priority claim and is paid first from any assets to be distributed by the bankruptcy trustee.