When you’re in trouble with the IRS, it feels like the stress will never end. But 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’ hold on your back 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 asses and collect your taxes.
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 civil 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.
Which statutes of limitations bind the taxpayer?
There are statues of limitations for taxpayers, too. If you hope to claim a refund or a tax credit, you must do so within three years of the filing date, or two years from the date you actually paid the tax (whichever is later). And if you failed to file your tax return on time, you must collect on your refund within two years of the date you paid.
How does the IRS’ statute of limitations affect your back taxes?
For the most part, it doesn’t. The IRS has rigid systems in place. As such, it is unlikely that they’d neglect to assess your taxes for six months, much less three years. If you have back taxes, you should do everything in your power to pay them off. If you don’t, you could rack up years of fees and penalties before the IRS comes to collect.
What should you do if you have unpaid back taxes?
First, determine how old they are. If it has been three years since the day they were due and the IRS still has not contacted you, you may be off the hook! The same goes if it’s been ten years since the IRS assessed your tax return (assuming there were no suspensions).
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. And that’s not all the IRS can do to make your life miserable. They can also garnish your wages, or issue a lien on your property to seize your assets.
However, odds are good that you cannot afford to pay your back taxes off in a single lump sum. If you could, you would have done so in the first place! So where should you go from here?
What if you can’t afford to pay off your tax debt?
Even if you can’t afford to pay off your debt, the IRS has systems in place to get you back on your feet. Here are a few strategies you can use:
- Apply for an offer in compromise , wherein you negotiate with the IRS and settle to pay less than your total debt.
- Set up an installment agreement and pay off your debt in a series of payments over a set period of time.
- 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.
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.
Back taxes can be stressful. But by understanding the laws that bind the IRS and the taxpayer, you can take control of your debt.