Statute of Limitations

Statute of Limitations on Back Taxes: What You Need To Know

When you’re in trouble with the Internal Revenue Service (IRS), it can feel like the stress will never end. Perhaps you have unpaid taxes, and the IRS is taking aggressive action in an attempt to get you to pay. You may think there is no way out and no way to pay your tax debt.

However, it is important to remember that even the IRS has rules to follow. If you want to regain control of your finances, it’s important that you understand the policy that restricts the IRS’ ability to pursue your unpaid taxes: the statute of limitations.

What is the IRS statute of limitations?

The IRS statute of limitations sets limits on the amount of time that the IRS has to assess and collect your taxes. The clock begins when you file a tax return. In summary:

  • The IRS has three years to audit your federal tax return in most cases.
  • The IRS has up to six years to pursue an audit in cases where 25% of a taxpayer’s information was omitted.
  • The IRS has ten years to take collection actions and pursue money that you owe.
  • In criminal cases, including tax fraud, there is no statute of limitations. The IRS can go as far back as it deems necessary.

All in all, the statute of limitations varies depending on the circumstances of the individual case.

Which statutes of limitations bind the IRS?

From the day that you file your taxes, the IRS has three years to assess your tax return and decide whether or not to audit you. However, if you dramatically over-state or understate your income, the statute of limitations extends to six years. And upon assessing your tax return, the IRS has ten years to collect your taxes. If they fail to do so within the time limit, they revoke their right to collect.

There is an exception to these limitations. If you commit tax fraud, or if you fail to file a tax return, the IRS has an indefinite statute. In other words, there is no limit to how far back the IRS can investigate a fraudulent or missing tax return.

Also, these time limits can be extended if the statute of limitations is suspended, which occurs when you file for bankruptcy. During a suspension, the IRS is temporarily barred from collecting your taxes.

What is the Collection Statute Expiration Date?

A Collection Statute Expiration Date (CSED) is the maximum time period that the IRS has to collect taxes from anyone who still owes them. CSED is used synonymously with the IRS statute of limitations.

In some cases, CSED can be extended or suspended, meaning that the IRS essentially pauses collection. Once the clock resumes, it will continue counting toward the new CSED.

Why would a CSED be suspended or extended?

There are many reasons that a CSED could be extended. Here are few common causes:

  • Filing for bankruptcy can extend the CSED.
  • If you file an extension, you may be granted an additional six months to pay your taxes. This can also extend your collection statute by at least six months.
  • The IRS can request that the CSED is extended by up to five years from the date it is signed, although the taxpayer has the right to refuse.
  • The CSED can be extended if the taxpayer resides for at least six months outside the U.S.
  • The IRS is in the process of reviewing an offer in compromise, installment agreement, or a request for innocent spouse relief.

Any of these possibilities could push the collection statute of limitations past the original 10 year period, giving the IRS more time to attempt to collect your back taxes.

How does the IRS statute of limitations affect your back taxes?

It is not likely that the IRS will fail to collect back taxes during the limitations period. However, it is possible. Depending on how old your tax debt is, you may be able to use the statute of limitations to negotiate a payment plan or have your tax debt wiped clean entirely.

This time limit exists to protect taxpayers and ensures that the IRS focuses its efforts on current issues rather than older infractions with deteriorating evidence. When you know how the law operates and why it is in place, you can use it to your advantage.

Can the IRS collect taxes after 10 years?

In most cases, the IRS will not collect taxes after the 10-year limitation period has lapsed. However, in certain cases, the limitation period can be extended. In more extreme cases, the IRS can collect taxes indefinitely. This includes criminal cases of tax fraud.

What should you do if you have unpaid back taxes?

Assuming you are still within the statute of limitations, your first step is to determine whether or not you can pay your dues today. If you can afford to do so, this is your best bet. Overdue taxes can rack up prohibitive fees and penalties from the IRS. Further, the IRS can take aggressive collection actions and make your life miserable. They can garnish your wages or issue a lien on your property to seize your assets.

However, many people cannot afford to pay back taxes off in a single lump sum. If you could, you would have paid your tax bills in the first place! So where should you go from here?

What if you can’t afford to pay your back taxes?

If you can’t afford to pay off your tax debt in full, the IRS has systems in place to get you back on your feet. Here are a few strategies you can use, along with an explanation of how and when to use each one.

Apply for an offer in compromise

With an offer in compromise, you can negotiate with the IRS and settle to pay less than your total debt. The IRS is more likely to go this route if the 10-year collection period is almost over. The IRS would rather be paid part of what they are owed rather than nothing. They also know that if the 10-year statute of limitations window lapses, they will no longer be able to pursue your back taxes, and they will be written off as a loss.

Keep in mind that an offer in compromise is not available to everyone. It is usually only an option for those with low income and few financial assets.

Offer in compromise: two main types

With a lump-sum payment, you can pay a cash amount that is less than the total amount that you owe. Although this is called a lump-sum payment, it can be split up into multiple installments as long as the total number of payments is less than five.

Conversely, you can offer to make periodic payments on your back tax debt. These are paid monthly over an agreed-upon period of time until the negotiated balance has been paid.

Set up an installment agreement

With an installment agreement, you can pay off your debt in payments over a set period of time. Short-term installment agreements are paid in fewer than 180 days, while long-term installment agreements over a longer time period. In order to be granted an installment agreement, you must apply with the IRS and be approved.

Ask the IRS to withdraw your tax lien from the public record

This may improve your credit score, making it easier to get an affordable loan with which to pay off your tax debt. This is a somewhat indirect and unconventional way to pay down your back tax debt, but could be effective depending on your income and how much debt you owe.

Hire a tax relief company

It can also help to have a tax relief company or law firm on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates. They may be able to help reduce your tax bills, resolve unfiled taxes, ensure that due process is followed throughout your case, and help you use the statute of limitations to your advantage. If you are unsure of how to solve your tax problems, it would be wise to contact a tax attorney or tax relief company to help you. The tax relief companies below are a great place to start.

Paying down your back taxes

If you have unpaid back taxes and don’t know how to proceed, consider hiring a tax professional. Tax attorneys are experienced negotiators, and their expertise can help you make a realistic plan for eliminating your tax debt. Need help finding a reputable tax relief firm? Compare top tax relief companies side-by-side here. Tax problems can be stressful. But by understanding the laws that bind the IRS and the taxpayer, you can take control of your debt.