Taxes may be constant in this world, but they too have an expiration date. When a tax liability is beyond its expiration date, the IRS can no longer assess or collect on the tax liability, even if they can prove that the taxpayer is able to pay it. This tax expiration date is better known as the statute of limitations. It may seem like a long stretch, but you can actually use the statute of limitations to your advantage as a form of tax relief. Here are some facts about it.
Assessment Time Limit
To begin with, let’s discuss the two concepts that will come in handy for tax expiration. First is the initial period of three years for which you can be assessed tax liability. The second is the period in which the IRS must collect the debt, or otherwise the tax liability is deemed to have already expired. You might read both instances being referred to as ‘statute of limitations’ so it might get confusing at first.
The first statutory limit of three years is the period during which the IRS can assess tax liability. This means that once the three-year period is over, the general rule is that the IRS can no longer assess taxes on the said tax return. To illustrate, for the year 2021, the IRS can only assess taxes as far back as returns filed for 2017, which were presumably filed in 2018. Tax returns for the year 2016 and beyond can no longer be assessed for the tax liability. So if you receive a notice that you’re being assessed for a tax return that’s beyond the three-year period, then there’s a good chance that you might be able to dispute it.
Of course, this also admits for some exceptions. For fraudulent returns, for example, the IRS is not constrained by time limits. The same holds true for unfiled returns. In some instances, the three-year period may be extended to six years such as when there’s a large understatement of income (usually 25% of your income).
Tax Expiration For Collection
Once a tax liability has been assessed, another time limit comes into play. The IRS, as a general rule, has ten years to collect the tax counting the day it was assessed. If the tax liability is still outstanding after this ten-year period, then the IRS can no longer collect on the tax.
It may be tempting to use this period to ‘wait out’ the IRS and hopefully have the debt erased in its totality. While tax expiration might work in some instances, this also has its drawbacks. During this ten-year period, the IRS will use all options available to it in order to collect the debt, such as placing a lien on your property or levying your bank account. Without the proper advice of a tax lawyer, you might suddenly find yourself subject to an IRS wage garnishment and intercepted tax refund.
In light of the length statute of limitations for IRS collection, it may be advantageous to secure a tax resolution option that keeps you out of IRS collections. These alternatives include but are not limited to offers in compromise and installment plans. If the IRS notices that the time is about to run on out on your tax liability, they might be more receptive to agreeing to a reduction of your debt.
Lastly, the ten-year period for IRS collections can be deceiving and it might end up being longer than ten calendar years. The following circumstances cause this period to be paused:
- Filing bankruptcy
- Filing an Offer in Compromise
- Filing appeals
- Filing a lawsuit against the IRS
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