IRS Collection Statute Expiration Date – Why do we talk about it so much?

wallpaper-clock-detail-in-london-streetThe very first thing I do when a person with a large tax debt balance hires me, is to calculate the IRS Collection Statute Expiration Date or CSED for short.

I calculate the clock.

Why do I care so much about this bit of information and write about it all the time?  I mean come – on….blah blah blah – clocks are boring.

If you read this blog, I understand what you are feeling.  Lots of talk about clocks and time.  REALLY BOOORING.

BUT…If you have a tax debt that has been lurking around awhile – these articles about the CSED should be interesting and for some of you, actually exciting…old clocks and all.

Let me explain by category…once again.

CSED and Offer in Compromise

An IRS offer in compromise is as it sounds.  It’s a formal process that allows you to try to make a deal with the IRS and settle the tax debt.  There are two primary reasons why the CSED makes a difference in relation to the IRS offer in compromise.

Number 1 – The CSED Determines Whether You Will Qualify

Can you read that aloud again so that all can hear.

I mean really…what’s more important than “whether you will qualify”.

So…it goes like this; The IRS gets to determine how much money you need each month to survive.  It starts with these things called IRS Standards or IRS National Standards and works it’s way up from there, deciding whether to add to the budget with your claims about child support, and tuition and 401k loans and credit card payments etc. etc.

It then looks at your income.  What it has been, what it is, what it will be, and makes a decision about what it thinks you income will be.

It then subtracts one from the other and comes up with a number.

It takes that number and MULTIPLIES IT BY THE CSED.   Example:  Number = $500.00 and CSED = 100.  or $50000.00

The IRS then calculates your asset value.  Example:  $50000.00.

The two are added and called the “reasonable collection potential” or RCP.  The RCP is compared to the debt amount. Example: Debt Amount –  $75000.00

RCP – $100,000.00

DEBT – $75,000.00

The offer in Compromise fails because the RCP is greater than the Debt.  BUT what if the CSED were only 20 months.  Would the RCP have been less than the debt?  Yes.

Number 2 – The CSED Tells you whether you should bother with the OIC

Once you understand how offers in compromise are calculated and what the CSED is and WHY IT’S SO IMPORTANT…you begin to see that sometimes you can just be wasting your time.  Pun intended.

Example – Waiting out the clock

Mr. Wonderful owes the IRS a big bucket of money.  He owns a home that has $150,000.00 in “quick-sale” equity, but he can’t borrow against it because he has bad credit, primarily due to the IRS’ lien but also because he buys too many suits and steak dinners on credit.  

The IRS wants to get paid, but realizes he can’t borrow against the home.  So, it agrees to put him in a partial pay payment plan, or a plan that doesn’t pay the entire debt off before the CSED is over.  It does this because it agrees he can’t afford to pay more than that every month.  

There are 4 years left on the CSED and he is paying the IRS $100.00 per month.  If everything stays the same, he will have paid the IRS $4800.00 over the next 4 years and his home will have increased in value. IF he files an offer in compromise, the offer amount will have to include the quick-sale value of his home and the CSED will stop running while he is in the offer.  

When he comes out the other end and is unsuccessful…the CSED will be waiting where it was left.  Mr. Wonderful chooses to stay in the payment plan.  Not Dumb. 


Much of what was written above applies here as well.  I won’t simply repeat it…thank goodness right?

But…be aware that the CSED matters in other ways as well when it comes to bankruptcy. The most important way it matters is in it’s calculation.  No…not in calculating the bankruptcy, but in calculating the CSED.  Why?  Because the CSED stops running when you are in bankruptcy.  Sometimes over a 10 year period people file for bankruptcy more than once.

So…sometimes people call me and say…”hey mike, I have this really old income tax debt and the IRS just levied my account.  I read about this CSED thing and I don’t understand why they are still collecting on me”.  My response…”have you ever filed for bankruptcy?”

The bankruptcy is the stickler.  What if a chapter 7 bankruptcy was open for 2 years?  Understanding the CSED is important.


There are several areas where the CSED and the calculation of an IRS payment plan intersect, but the most common way is when a person owes the IRS less than $50,000.00 and wants to avoid filing a 433 financial statement.  IF the CSED has 72 months or more left on it, the IRS will usually agree to simply divide the debt by 72 months and put that person into a “streamlined” payment and IF no lien notices have yet been filed it won’t file them.

Great huh?

But what if the CSED only has 40 months remaining.  Will the IRS still allow the payment over 72 months?  No.  It should allow it over 40 months.

What if the debt is $50,000.00 even.  Over 40 months that’s $1250.00 per month.  Over 72 months – 695.00.  Which would you prefer?

In a strange way, higher income earners with less than $50,000.00 in tax debt want the CSED to be longer…usually.

We hinted at another example above.  The Partial Pay scenario and Mr. Wonderful.

To re-state it a bit.

In certain circumstances – the CSED can really hurt.  Even if the payment plan you negotiate with the IRS is “small”.  If the CSED is large, you run a much greater risk of problems. TIME isn’t your friend.

Example – Partial Pay vs. Chapter 7 Bankruptcy

Ms. Nositall owes the IRS $30,000.00 as a result of some unpaid taxes on a cashed out retirement plan.  She has long since spent the money and has taken a job making $25.00 per hour.  She isn’t a good offer candidate based on the RCP, but she has been able to convince the IRS to put her into a monthly payment of $395.00 per month.  It’ painful, but better than a wage garnishment.  THE PROBLEM is that she has 6 years remaining on the CSED and she plans on making more money at this job in the coming year and beyond. She is also struggling to pay some credit card debt.  She speaks to her attorney and learns that when the IRS sees the higher income (new w-2 or tax return) it will want to re-negotiate the payment plan and bump it up quite a bit.  She qualifies now to file a bankruptcy, and the entire tax debt qualifies to be discharged along with her credit card debt.  Her choice: Bankruptcy.  

Clocks are important and sometimes interesting.  They keep track of time… and if you have a large tax debt, time is of the essence.

Negotiating a streamlined payment plan with the IRS on your own

success-thumb-375x249-55717          Most payment plans arranged with the IRS are “streamlined” plans.   An IRS streamlined payment plan is one that allows the taxpayer up to 72 months to pay the debt if the original debt assessed is less than $50,000.00, all returns have been filed, and the taxpayer agrees to allow the IRS to withhold the payment from a checking account each month.
          For taxpayers who can’t afford to pay the balance over 72 months, or that don’t have 72 months remaining in the IRS statute of limitations period, the negotiation of a payment plan may get a bit harder.  The problem is that thousands of people each year who qualify for a streamlined plan and who can afford to make the streamlined plan payment, give TV or radio tax debt companies thousands of dollars to set them up.  For most people a streamlined payment plan can be done without paying for help at all.

Here are the steps you need to take if you want to try to set up a streamlined payment plan yourself:

Step 1 – Make sure you actually owe the money.

          It is possible that the IRS has filed substitute return(s) that are incorrect, or that the IRS statute of limitations on collection is about to run out on a particular year, or that the IRS has miscalculated the debt, penalties or interest, or the audit determination the IRS gave you is just wrong and is appealable.  You don’t want to arrange a payment plan if you can avoid it, until you are certain that the debt is correct.

Step 2 – If the debt is correct…how much is it?

          You need to have an overall debt that is less than $50,000.00 “assessed”.  The IRS doesn’t consider the accruals of penalty and interest after the original assessment date as part of the “assessed” balance for purposes of a streamlined agreement.  On the date the IRS reviews your return and enters the debt into the books it also adds any penalty and interest owed as of that day.  That amount is the “assessed” balance.  Penalty and interest that accrue after the assessment date aren’t.  The IRS will tell you what it shows the assessed balance is and you can order IRS account transcripts to review the original amount and the penalty and interest originally tacked on to verify it.
          So..if the overall debt is $66,000.00, the assessed amount amount may only be $53,000.00.  If so, than you may be able to pay $3000.00 in order to get the assessed balance to $50,000.00 and pay $66,000.00 over 72 months from your bank account.   Find out what the assessed balance is, make sure it is $50,000.00 or less.

Step 3 –  Make sure that you can afford the payment.

          Look realistically at your income and your budget.  Break them down on average per month.  Include every possibly item you spend money on.  Make sure that you can afford the payment plan you are going to set up with the IRS.  Take into account a bit of interest on the debt as well.
          If you find that you can’t afford the payment, you probably need to stop here and call to ask about other options.  But if it is clear that the payment of all the debt with interest is doable,  move ahead.

Step 4 – Make sure you have 72 months remaining in the statute of limitations period

          If you have 3 debts from 3 different years and one of them only has 1 year remaining on the statute period, this won’t work very well unless the overall payment total will pay that year off within the time remaining on it’s statute period.
An example:
Year 1 total: $10,000.00
Year 2 total: $10,000.00
Year 3 total: $20,000.00
Year 1 statute period remaining:  12 months
Years 2 and 3 statute periods remaining: 80 months
          The total debt is $40,000.00.  This amount divided by 72 is $555.55 per month.  $555.55 over 12 months is only $6666.60, or less than the Year 1 total debt.  In this scenario the payment would have to be greater than the $555.55 per month in order to ensure Year 1 was paid within 12 months.

Step 5 – Call the IRS

          I know…this is the last thing you wanted to hear.  But the reason I suggest this is that when you just submit a 9465-FS form  and request a streamlined plan in writing first, IF it is denied because the numbers aren’t right, AND you are subject to collection, the IRS may garnish your wages or levy your accounts before you know what has hit you.
          It is typically better as a result, to review the assessed balances with the IRS, the totals, the payment plan numbers, statute periods, mailing addresses etc. before filling out the 9465 fs form just to add a bit of assurance that you got it right and that your request when sent in, won’t be rejected.

Step 6 – Getting Help

          If you are going to have an attorney help you with this, make sure that you don’t pay more than you should.   The attorney should be able to determine whether you qualify for a streamlined plan within a few hours and finalize and follow up to ensure it is in place within a few more.  Don’t pay a large amount for streamlined payment plan help when you can certainly figure this out on your own.

How many years will my IRS currently non collectible status stay in place?

calendar-thumb-375x250-49268When you are in an IRS currently not collectible status (CNC status) you are protected from IRS collection enforcement.  The IRS can’t levy or garnish and other than possibly filing a notice of tax lien, it leaves you alone.

This sounds great,  but in order to be placed in this status you have to convince the IRS that paying would be a real financial hardship.   For some people this is difficult to do.  Despite this, the U.S. Treasury Inspector General consistently reports that a few million people are in this status at any given time.

Many of our clients use CNC status in combination with the IRS’ statute of limitation on collection to get rid of the debt entirely.  An example:

Mr. Smith owes the IRS $100,000.00 and is now facing IRS enforced collection.  6 years of the IRS’ 10 year statute on collection have passed and Mr. Smith has 4 years remaining until the statute removes the debt permanently.  He is retired and living on social security and a small pension.  The IRS agrees that he qualifies for currently not collectible status and discontinues collection activity.  Other than receiving reminders from the IRS about the debt amount, the IRS makes no attempt to collect for 4 years and Mr. Smith’s debt is wiped away.

Sounds great of course, but the IRS also removes people from currently non collectible status on a regular basis for the following reasons:

1.   Failure to file and pay all future taxes

The most common reason we see for people being removed from this status is the failure to file a subsequent tax return and/or the failure to pay subsequent taxes when they come due.  Nothing will get you booted sooner because the IRS system can easily ascertain when a return is late or a payment is late.

2.   Increase in Income

When you file a tax return the IRS can see whether your income situation has improved and will often as for an updated set of financials to determine whether your can afford making a payment.  When it sees the financials and a new ability to pay, you will be removed and a payment plan will have to be negotiated.

3.  Formal Review

The IRS will often mark your file for a formal review when it agrees to place you on CNC Status.  Every few years the system will issue a request for updated financial information from you.  The revenue officer or collections will do this when they believe that your income may go up in the future.

4.  Right to Review at any time

In the end, the IRS has the ability to review CNC status for any reason at all.  If you have several years remaining on your 10 year statute period, you will want to look at other long term options like an IRS offer in compromise or bankruptcy in order to avoid this.




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)

I have a Serious IRS Tax Debt and I have been out of the Country for a few years, how will being out of the Country affect my Tax Debt?

bigstock-Face-Of-Antique-Grandfather-Cl-1687387The IRS’ ability to collect a Tax Debt ends 10 years after the IRS assesses the Tax.  This also applies to IRS Liens. This 10 year period starts running on the date the IRS assesses the Tax or writes in down in it’s books as a debt owed by you.  The 10 year period doesn’t start to run when the IRS lien is recorded.


Fred owes unpaid Income Tax for the 2005 tax year.  This tax was “assessed” on October 20, 2007.  The IRS records it’s Lien in August of 2010.  The 10 year date from assessment will occur on October 20, 2017.  The Lien will self release on that date as well.

Most Important Exceptions


If the IRS sues you on the underlying debt and obtains a Judgement, it will than be able to renew that Judgement indefinitely and the Statute of Limitations period won’t help you.


Filing a Bankruptcy will extend the Statute for a period equal to the time in Bankruptcy plus six months.  If you file a chapter 7 bankruptcy and from filing date to closure date the case is open for 12 months, the Statute of Limitations on collection will be extended for 12 months.

Offer in Compromise

The filing of an IRS Offer in Compromise stops the clock from running as well during the time in the Offer plus 30 days.  Sidenote…most Offers are still rejected, so if you are going to use an IRS Offer in Compromise in hopes of eliminating tax debt, make sure you have a good chance of winning.


As a general rule, appealing IRS collection activity will stop the Statute of Limitations Clock from running as long as it stops IRS Collection Activity.

Out of Country

If you have been out of the Country for a continuous period of more than six months, that absence will extend the statute period as well.   Generally, the time period of extension is limited to 5 years.


If you have been out of the Country for continuous period of one year visiting family, than the Collection Statute can be extended for 1 year as that period is longer than 6 months. If you visited family for less than 6 months, the extension won’t apply.

Important to Know the Date

If you have a serious Tax Debt and it has been around for a while, it will be important to know the 10 year collection statute date before embarking on an IRS Offer in Compromise, Bankruptcy or some other serious legal option.  Your solution may be as simple as arranging or re-arranging an installment agreement or non-collectible status with the IRS and waiting out the clock.

Does an IRS installment plan extend the 10 year collection statute?

Does an IRS installment plan extend the 10 year collection statute? An IRS Installment Plan doesn’t extend the IRS Statute of Limitations period for the collection of debt.

The IRS has 10 years to collect a tax debt.  The 10 year period begins on the date the tax balance is “assessed”. The tax is usually assessed when the IRS processes the tax return.

If your 2004 tax return was received by the IRS and processed on April 16 of 2005, for example, then the statute period would expire on April 16th of 2015.  If you filed the return on April 16 of 2010, then the statute would expire on April 16 of 2020.

Certain actions extend this 10 year statute period.  Bankruptcy, Offer in Compromise and certain appeals will all extend the time-frame.

An Installment Agreement with the IRS doesn’t do it.  When the statute period ends the debt is gone and the Installment Agreement will end.

It is important as a result to understand two things before you file an Offer in Compromise, a Bankruptcy or an appeal.

1.   How much will the IRS installment agreement be per month.

2.   When will the IRS Statute of Limitations period end.

It often makes sense to simply negotiate the Installment Agreement and wait for the Statute to kill the debt.

An example:

Mr. Smith owes the IRS $60,000.00 related to a failure to pay tax on an investment he cashed out in 2007.  He filed his return in April 2008 timely and just recently the IRS began to levy his paycheck.

Given his current income, budget and asset situation, he was able to arrange a payment to the IRS of $250.00 per month.  He doesn’t expect his income or budget to change in the near future and the Statute of Limitations date will run in April of 2018 or 10 years from the date the tax on the 2007 debt was assessed.

$250.00 dollars per month multiplied by the remaining time left in the statute period means that Mr. Smith will only pay about $15,000.00 of the $60,000.00 balance.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]

IRS LEVY – Two reasons to file the IRS Collection Due Process Appeal late

jim brown si-thumb-375x498-60919IRS LEVY? Two reasons to file the IRS Collection Due Process Appeal late

The IRS is a debt collection machine. If there were an NFL Draft for debt collection outfits, the IRS would be the first player drafted every year.

Part of the reason why the IRS is so good at its job is because it has it’s hands “untied”. Unlike normal creditors the IRS doesn’t have to file a lawsuit and obtain a Judgment to begin the collection process. It just has to “assess” or place the debt into its books as an amount owed and issue some notices to the taxpayer by mail.

There are just a few ways to slow it down. One of the most important is the ability of the taxpayer to file a Collection Due Process Appeal.

If the IRS levy machine is the equivalent of Hall of Fame Running Back Jim Brown, the Collection Due Process Appeal is the equivalent of Dick Butkus.

The Collection Due Process Appeal, properly and timely filed, will stop the IRS collection activity cold, until a referee steps in to determine whether there is a better alternative than levy or garnishment. That referee is initially an Appeals Officer with the IRS, but it can be the US Tax Court. This type of Appeal levels the playing field.

So if the Collection Due Process Appeal is so great…why in the world would I tell you that there may be two occasions when you should file it late i.e. not on time.

Let me explain:

Filing the Collection Due Process Appeal late is called an “Equivalent Hearing” request. “Equivalent” to a Collection Due Process Hearing….

It isn’t really equivalent though because when you file the appeal late, you will lose a few rights:

1. The right to have your case heard by the appeals officer

The IRS doesn’t have to stop the levy activity and give you a chance to be heard by the appeals officer. These equivalent hearings are granted on a case-by-case basis and aren’t absolute.

However, the Internal Revenue Manual guides tells the IRS to process the late appeal and give the taxpayer a hearing while placing a hold on collections. In most cases the IRS does this…even if the request if filed a year late (1 year is the deadline to file the late request)

2. You lose your ticket to US Tax Court

You will not be able to ask the Tax Court to rule on the reasonableness of the IRS collection activity. Most people don’t anyway.

So again…why not just file the appeal on time?

Two reasons:

1. When you don’t want to stop the Statute of Limitations clock from ticking

As you probably know, the IRS has 10 years to collect the debt. The timely filed Collection Due Process Appeal stops this clock form running. If you are close to the 10 year period, and in your situation it would make sense overall, the equivalent hearing request will typically allow you to get your hearing and the benefit of a shorter collection clock.

2. When you don’t want to stop the clock from running on the discharge of tax debt in bankruptcy

The Collection Due Process Appeal will stop 2 of the 3 time periods that must be met in order to treat income tax as dischargeable in a bankruptcy case.

a. The 3 year rule – the bankruptcy must be filed more than 3 years after the return was due to be filed

b. The 240 day rule – the bankruptcy must be filed more than 240 days after the debt is assessed or placed in the books by the IRS

Equivalent hearing requests don’t stop either clock. If you are otherwise a good candidate for bankruptcy, and the timeframes to get you there are what is holding you back, you will not want to stop those time frames from running by requesting the wrong type of hearing.

image credit – si


IRS Debt: The stuff of sleepless nights and serious regrets.idea_lightbulb_cartoon2-thumb-375x491-53213

If you have a serious tax debt ,you may have some regrets and worse…you may feel as if there won’t be a viable solution.

I can tell you though that for many people with serious tax debt problems, there is hope. Many of my clients can attest that if you are willing to create a plan, and combine it with some patience and hard work, you can substantially reduce or even eliminate the debt.

The following legal methods are the most common ways we do it.

1. IRS Statute of Limitations

The time period the IRS has to collect is limited to ten years by 26 U.S.C Section 6502. The 10 year date is important, and we often use a payment plan or non collectible status to get to it.

Here is an example:

My client had a tax debt that had grown to $100,000.00 over the course of 7 years. He had been in and out of payment plans with the IRS. His tax debt had reached an age that it was dischargeable in bankruptcy but he didn’t want to file a bankruptcy. He would have “qualified” for an offer in compromise with the IRS as well.

However, he was going to retire and his income was going to drop in half. That reduction in income allowed him to negotiate a new and very small payment plan with the IRS of $50.00 per month. As his new income was not going to increase and his overall situation was going to stay substantially the same, he decided to finalize the payment plan negotiation and wait for 3 years.

At the end of the 3-year waiting period, he had paid approximately, $1700.00 toward the $100,000.00 debt, the remainder was wiped away and the IRS lien was released.

The above scenario is common, and much more common than you would think. In many cases it is wiser to “lay low” and let the clock run, than to take a more of a risk in terms of cost and file an IRS offer in compromise or a bankruptcy that will stop the statute of limitations clock from ticking away.

2. Challenge the Amount of the Tax Debt

The IRS assesses incorrect tax debts all the time. These incorrect assessments are typically the result of an IRS audit during which the taxpayer wasn’t able to prove the case or the creation of an incorrect return by the IRS because the original return was never filed.

Here are some options:

Appeal the Audit Result

IRS Audits can be appealed and they can be appealed all the way to the US Tax Court if the rules are followed. If you know that the IRS got it wrong, appealing the case may be the best option.

Appealing the IRS Substitute Tax Return

If the IRS files a return for you, it is usually incorrect, and often results in a debt that is larger than it should be. The IRS uses this incorrect debt to engage in collection activity.

These incorrect returns can be appealed as well. Most people don’t file the appeal on time, and in those cases a process called an “Audit Reconsideration” is used. The IRS will usually accept a correct return during the Audit Reconsideration process, and replace the incorrect return reducing or even eliminating the debt in some cases.

Trust Fund Recovery Assessment – It can be challenged

If you are signing checks, or making decisions about which bills should be paid for a business you can be held personally responsible for the trust fund portion of any employment tax the business should be withholding. If the IRS issues this assessment, you must consider appealing the decision or you will have a debt that is not dischargeable in bankruptcy and that is typically very large.

Innocent Spouse Relief – If you didn’t know you shouldn’t have to pay

Sometimes the spouse will hide some things from you like the fact that he or she didn’t disclose all of the income earned at the business on your joint return. There is often egal redress for the innocent spouse in these types of cases.

3. IRS Offer in Compromise

The US Tax Code at 26 U.S.C Section 7122 lays out the law regarding the IRS Offer in Compromise. The IRS Offer in Compromise is just the Government’s program for those it believes have little ability to pay all if the tax debt over a period of time. The amount the IRS uses to determine whether the debt can be paid or not, is called the “IRS reasonable collection potential”.

In the past, most IRS Offers in Compromise failed and they did primarily because the formula used to determine the reasonable collection potential was weighted in the IRS’ favor.

In May of 2012, the IRS changed the rules. We think that these rule changes will increase the number of successful Offers in Compromise. Anyone with serious tax debt should have an experience tax resolution attorney analyze whether an offer will make sense.

4. Bankruptcy

Many aren’t aware that bankruptcy can be a powerful option in dealing with IRS debt. Certain tax debts can be reduced or even eliminated in bankruptcy. bankruptcy.

The most important thing to understand about tax debt and bankruptcy is that the bankruptcy code trumps the IRS. If an offer in compromise doesn’t make sense, the taxpayer will often end up making unreasonable payments to the IRS on the debt over a long period of time. A bankruptcy must be considered in those instances.

An installment agreement is often used prior to the filing of a bankruptcy primarily in order to ensure that the date requirements for discharge of the tax debt are met. The Bankruptcy Code requires that the tax is based on a return that was due at least 3 years prior to the bankruptcy filing and that the return was filed by the taxpayer at least 2 years prior.

We have used bankruptcy to help our clients eliminate or substantially reduce millions of dollars in tax debt. For many, it will be the best option in the end.

5. Penalty Abatement

There are upwards of 140 IRS penalties and each one of them has an exception based on “good faith”.

The most common penalties we see are the failure to file and the failure to pay penalties. These can be removed even though you filed the return late and paid the balance late, if you acted in good faith and there was some reasonable basis for the failure.
Removal of these penalties can help in cases where the taxpayer will end up paying most of the debt in an IRS payment plan.

If the debt will be reduced in an IRS offer in compromise, or in a bankruptcy, the amount of the penalty is usually irrelevant and no request for penalty abatement is necessary.

When the IRS audits, adjusts or files a substitute tax return, pay close attention to deadlines

IRS Audit?  Pay close attention to deadlines, they mean something

A great number of Americans owe the IRS at any given time.  Some estimates are as many as 10-15% of all taxpayers owe…right now.   The most common reason I see a consumer owing tax, is the most obvious one; the taxpayer just didn’t withhold enough or pay enough during the year or at the time the return was filed.  There are other reasons though that cause the tax bill to be a surprise to many like:

  • The IRS audits the return and the taxpayer ends up signing the audit report and agreeing to the amount
  • The IRS audits the return, the taxpayer appeals the audit assessment and loses the appeal but doesn’t file tax court petition.  The tax bill then becomes a final bill.
  • The IRS audits the return, the taxpayer doesn’t agree but also doesn’t appeal or file a tax court petition.
  • The IRS audits the return, the taxpayer appeals, files a tax court petition and still loses and therefore owes.
  • The taxpayer files what he believes is a correct return but the IRS later adjusts the return as a result of missing income.
  • The IRS filed a tax return for the taxpayer called a substitute return, the taxpayer doesn’t appeal timely, and sent the taxpayer the bill.

The problem with every one of these scenarios is that at the end… the tax debt is set in stone.  I.E.  challenging the amount internally becomes very difficult if not impossible.  Also, once the debt is assessed and a notice period passes, the IRS doesn’t need court approval to take a paycheck or bank account.  It can seize assets, record a notice of tax lien that will destroy a credit rating,  and tack on penalties and interest to the debt.

The point of this post is to show you how tax debt is created, so that you can take to heart the following advice if any of the above happens to you:

Don’t allow deadlines to pass.  The failure to respond timely and properly can result in a debt that may not actually be correct.  I see this constantly and am dismayed about how often it could have been avoided.

Designating how payments are made to the IRS – When is it important? Hint…Statute of Limitations and Bankruptcy

Designating how payments are made to the IRS

If tax debt is owed to the IRS for more than one previous year or quarter, it is wise to tell the IRS how to apply the payment you are making to your tax bill. This is often called “designating” the payment.

If you don’t tell them where to apply the payment, they will apply it however they want.

Even more important, the payment will usually be applied to the oldest year or quarter that you owe money on.

This is important for two reasons:

a. The IRS is limited to 10 years to collect all the tax, penalty and interest.

If they apply to the oldest tax, penalty and interest, and that debt is close to the 10 year mark, you may be just throwing the money away. In essence, it would be much better to let the 10 year limit kill the old debt and your payment kill the newer debt, letting the two “work toward” each other until the debt is wiped about. This way you will likely pay much less in tax debt overall.

An Example:

Lets assume you owe for tax years 00 in the amount of $20,000.00 and 09 in the amount of $20,000.00. 00 was assessed on Sept 30, 2001. On Sept. 15, 2011, you want to make a payment to reduce your tax debt.

You send a check to the IRS for $20,000.00. The IRS applies the amount to the 00 tax year of course.

What if you had designated the payment to the 09 tax year. The IRS would have applied it to 09 zeroing that out and just two weeks later the statute of limitations would have zeroed out the 00 debt saving you $20,000.00

b. Bankruptcy

If you are considering bankruptcy and have old income tax debt, some of it may be old enough to be wiped out in the bankruptcy. You wouldn’t want to have payments applied to debts that are going to be wiped away anyway.

Making the designation

When you make an income tax payment with a check or money order it is a good idea  to write your social security number, tax period and the year you are pyaing in the lower left hand corner. If it is a business related tax than use the taxpayer id number instead of course.

Include with the check or money order a letter that states clearly what period and or year you want the payment to be applied to and reference the check or money order.

Send the letter and payment by certified mail and keep copies of all the documents. If the IRS ignores your request you can then later send proof of your request and payments to get it corrected.

Only the payments that are made voluntarily can be designated like this. If the IRS levies a wage or bank account or withholds the tax refund – no designation can be made.