Both the Internal Revenue Service (IRS) and the California’s Franchise Tax Board (FTB) have tax collection Statute of Limitations. The Statute of Limitations refers to the period of time during which the IRS and FTB can legally collect taxes, penalties, and interest from a taxpayer. Once the Statute of Limitations clock runs out, then what remains owing on the tax debt is erased. For federal taxes, the IRS’ clock on legal ability to collect taxes is 10 years. For California state income taxes, the FTB’s clock is officially 20 years. But, there are things that stop the clock, thus extending the time the tax agency has to collect the tax liability.
IRS 10-Year Tax Collection Statue of Limitations
The IRS has 10 years to collect a tax liability, beginning from the date the tax return was filed or the tax was assessed (almost always April 15th), whichever is later. The assessment date changes for an amended return or for a Substitute-for-Return (a tax return the IRS prepares and files for you if you fail to file) to the date the amended or SFR return was filed. If nothing stopped the 10-year clock then, on the 3653rd day of the liability, the unpaid balance effectively disappears because the IRS may no longer collect from you (I.R.C. Section 6502). The expiration date is called the Collection Statute Expiration Date (CSED). Thus, if you filed your 2023 federal tax return this year on the due date of April 15, 2024, then the CSED is April 15, 2034.
What Stops Statute of Limitations Clock?
Several events will stop the collections clock, thus extending the CSED.
A Bankruptcy filing stops the collections from the date the Bankruptcy Petition is filed, until the final Discharge of Bankruptcy is received, generally about 4-6 months.
An Installment Agreement request stops the collections clock for the amount of time that the request is pending until it can be reviewed by the IRS. If the requested Installment Agreement is rejected, the clocks stops for 30 days. Similarly, if there is a default on an Installment Agreement payment, then the clock stops for 30 days. Lastly, if an Installment Agreement rejection or termination is appealed, then the clock is suspended by the amount of time the appeal is pending to the date the appealed decision becomes final.
An Offer-in-Compromise stops the clock from the date the Offer in Compromise is submitted to the date the offer is accepted, returned, withdrawn, or rejected. If the Offer is rejected, then the collection period is suspended for an additional 30 days and, if there’s an appeal of the rejection, then the time appeal is pending also stops the clock.
A Collection Due Process (CDP) request will stop the clock from the time the IRS receives the CDP request to the date the taxpayer withdraws the request or the date the CDP determination becomes final, including any court appeals. If less than 90 days until the CSED remains when the determination becomes final, the collection period is extended to 90 days from the date of the final determination.
An Innocent Spouse Claim stops the clock for the requesting spouse’s collection period from the date the Innocent Spouse Claim was filed until the the date a waiver is filed.
Confused? If it feels like you need a computer to make these calculations, that is sometimes the case. Call me if that happens – I’m used to figuring out CSED, but no “civilian” should be.
Tips for An IRS Collections Statute of Limitations About to Expire
If you have a big tax debt, that’s 8-9 years old, and you’ve never been in an Installment Agreement on that debt, then here’s how to deal with it. If you’ve been lucky enough to not have the IRS levy on you, place liens on your property, or otherwise take decisive collection actions or threaten them (yes, it *does* sometimes happen that the IRS ignores tax debt for this long), then don’t poke the bear! Don’t call the IRS to ask “What’s up?”, or volunteer to get into an Installment Agreement. Whatever has taken you off the IRS’ radar is likely to continue. Give thanks instead for your good fortune.
Alternatively, if you are in an Installment Agreement and you’re within 4-8 months of the collection clock expiring , then you could consider stopping payments. Here’s why. Once you stop making payments on an Installment Agreement, it takes 2-6 months for the IRS to realize payments have stopped, and to contact you. The gamble here is that the expiration will occur before the IRS contacts you. If it doesn’t, and an IRS collections officer contacts you, you can plead poverty for the missed payments and apply for a new Installment Agreement for the remaining months until the clock runs out on the IRS ability to collect from you. This can be a risky strategy, depending on the your prior “relationship” with your collections officer, so call me to discuss the specifics.
FTB’s 30-year Collections Clock
The FTB is meaner than the IRS, as its 20-year tax liability expiration clock makes clear. While the FTB clock stops for the same things as the IRS’ clock, it does not restart the expiration clock once an Installment Agreement begins. Moreover, the FTB restarts the 20-year clock, FROM THE BEGINING, every time it adds any penalties, fees or interest to a tax liability (Cal Rev. & Tax. Code section 19255). In other words, the FTB effectively constructed a “forever” clock. California state legislators stepped in to impose an effective 30-year statute of limitations clocks by adding to the California Constitutions the following: “Every tax shall be conclusively presumed to have ben paid after 30 years from the time it became a lien.” (Article XIII, paragraph 30).
California’s EDD and CDTFA Collection Clocks
Think the EDD is bad with its 30 year collection clock? Guess which two tax agencies have NO collection clock whatsoever? California’s Employment Development Division, which is responsible for unemployment taxes. And the California Department of Tax and Fee Administration, which is responsible for state sales and use taxes. However, the 30-year collections clock imposed by the California Constitution also covers these two agencies.
September 20, 2024