An oft-overlooked aspect of effectively resolving a tax liability with the IRS is understanding how long the IRS has to collect on a particular liability. The IRS’s statute of limitations on collections is what the IRS refers to as the Collection Statute Expiration date, or more commonly, the “CSED.” The CSED is codified in §6502 of the Internal Revenue Code, which provides that the length of the period for collection after assessment of a tax liability is 10 years. As with anything in the realm of tax, in practice the rule is not that clear cut, and there are a number of laws and regulations that impact the amount of time the IRS has to collect on a balance.
First, it is important to recognize that the CSED begins running from the date of assessment, which is distinct from the due date of the return giving rise to the liability or the date the return is actually filed. Rather, the 10 year limitations period starts to run on the date that the return is processed by the IRS and the balance is formally assessed in their system. Furthermore, because the CSED runs from the date a particular tax balance is assessed, it is possible for one tax period to have assessments with disparate CSEDs. For example, if an original return is filed and generates a tax balance that is not paid, that initial balance generated when the return was filed will have one CSED. However, if that same tax return is audited by the IRS two years later, and additional taxes are assessed, the audit assessment will have a separate CSED tied to the closing of the audit, so the IRS would have approximately two years longer to collect on the audit-assessed portion of that year’s tax liability.
Second, there are a number of events that pause, or “toll,” the running of the Collection Statute Expiration Date. As a general rule of thumb, any time that the IRS is prohibited from collecting on a balance, the CSED associated with that balance will be tolled. For example, if a taxpayer timely requests a Collection Due Process hearing in response to an IRS Final Notice of Intent to Levy, the IRS is generally prohibited from taking any collection action with respect to that balance until after the CDP hearing has been held. As a result, the CSED associated with the tax balance covered by the CDP hearing request will be tolled until after the hearing has been held. If, on the other hand, the taxpayer requests an equivalent hearing, which does not prohibit IRS collection activity, the CSED would not be tolled pending the hearing. Other events that toll the CSED include pending Offers in Compromise, pending Innocent Spouse Requests and pending petitions for Bankruptcy.
An important consideration for taxpayers residing out of the country is that IRC §6503(c) provides that the CSED is suspended for any period during which a taxpayer is absent from the United States for a period of more than 6 months, and the CSED cannot expire for at least 6 months following the taxpayer’s return to the country. This has serious implications for resolving outstanding tax liabilities for taxpayers living abroad. For example, in order to qualify for the IRS to consider an Offer in Compromise, a taxpayer generally must demonstrate that the IRS should not expect to be able to collect the tax owed, out of the taxpayer’s assets and monthly income multiplied by the number of months the IRS has remaining to collect. In the case of taxpayers residing inside of the country this usually means their monthly income will be multiplied by 120 months or less. Because the CSED is paused while a taxpayer is residing overseas, the IRS would have an indefinite amount of time to collect on the liability at the time the Offer is submitted. Therefore, the IRM provides that Offer Examiners should calculate the taxpayer’s Reasonable Collection Potential by multiplying their monthly income by 16 years, or 192 months. That means that a taxpayer residing outside of the United States will generally have a harder time qualifying for offer consideration than a taxpayer with an identical ability to pay but residing inside of the United States. CSED tolling for taxpayers living abroad will generally not happen systemically, but rather IRS employees are instructed to manually recalculate and update the CSED when certain events occur, including:
A Form 433-A is submitted stating the taxpayers dates of residence outside of the United States,
Written information provided to the IRS stating the taxpayer was outside of the United States,
Oral statements made to the IRS indicating the taxpayer was outside of the United States,
Tax returns have consistently been filed since the year of tax assessment with a foreign address listed for the taxpayer.
Fortunately, the IRS does provide some relief from the onerous collections implications of an indefinitely tolled CSED, however the relief is conditioned on “cooperation” with the IRS. The IRM provides that a taxpayer will be considered “cooperative” if the IRS “determined that the taxpayer has fully responded to the IRS and has provided full information to the IRS with respect to collection of assessment.” If the IRS determines that a taxpayer has been cooperative, it will typically exercise restraint in recalculting the CSED. The bottom line, however, is that if you owe taxes and the IRS is aware that you’re living overseas, the tax liabilities might never go away, and the best course of action is typically to work in earnest with the IRS to achieve a collection alternative.
The CSED associated with most tax liabilities within the IRS’s inventory is calculated and adjusted automatically by the IRS’s computer systems, but is still reliant on IRS employees to properly input transaction codes into their system. The IRS uses these transaction codes to input certain events into the system, such as the filing of an Offer in Compromise, which will automatically toll the CSED until a reversing code is input into the system. The CSED can also be manually adjusted by IRS employees with the authority to do so (such as in instances of taxpayers living abroad). Taxpayers can view the IRS transaction codes and CSED and tolling information by requesting their account transcripts from the IRS, though decoding the transcripts can be a daunting task for the uninitiated. Unfortunately, any practitioner that has worked with the IRS for even a short while will tell you that there are frequently errors with the CSED posted in the IRS system, and a wrongly calculated CSED can mean the difference between a balance being properly written off by the IRS upon its expiration, or a bank levy being issued against a balance the IRS no longer has the legal authority to collect on. It can mean the IRS incorrectly rejecting an Offer in Compromise because they’ve calculated the taxpayer’s Reasonable Collection Potential utilizing an incorrect number of months.
A deep understanding of how the CSED is calculated and impacts IRS collections can therefore be crucial in achieving an optimal resolution to your tax matter. That’s why I typically recommend new resolution clients allow us to request a full compliment of available IRS transcripts, which we then compile into an easy-to-read report which is provided to and reviewed with the client. The initial investigation allows us to check for potential issues that could pose obstacles to resolution and to plan the best path towards resolving their tax liabilities.