Your Tax Debt Can also Expire!

The maximum time frame within which the Internal Revenue Service can collect your tax debt is called the statute of limitations.  It is also called the Collection Statute Expiration Date (CSED).

The CSED is ten years from the date your back taxes were assessed.  After this date, the Internal Revenue Service is supposed to erase whatever back tax you owe.  Of course, it is not really that easy.  In some cases, they may decide to erase whatever lien they have placed against you and lower it to a judgment.  Then, they can chase that judgment for an additional ten years.

Even without doing that, the Internal Revenue Service can extend your CSED.  For example, if you claim bankruptcy, the CSED can be extended for the term of your bankruptcy plus six months.  Bankruptcy does not erase tax debt.  Tax debt remains and as soon as you are out of bankruptcy, the Internal Revenue Service will resume its collections undertaking.  Many people have been shocked to come out of bankruptcy and find a tax debt waiting for them that they supposed had expired several years prior.

Years ago the Internal Revenue Service had a form 900 that waived the CSED.  They would cut deals using this form just as they were about to levy.  The form saved you from levy at that time, but waiving the Collection Statute Expiration Date literally gave the Internal Revenue Service forever to collect from you.  This practice was later banned.

Your CSED can be extended if you leave the country for any period of time.  Your CSED can be extended during the period you apply for an Offer in Compromise and for the time you undergo due process hearings related to collection.  They can even extend your CSED while you are on military deferment.

In determining the period of a CSED, remember that the term is ten years from assessment.  If you have a passed return that you just filed, the CSED is from the time that debt is assessed, and not from the time it was owed.

If you don’t file a return, that doesn’t necessarily mean that you have gotten away with anything.  The Internal Revenue Service can file a substitute return for up to three years.  They often wait just until the three years is almost over and then they can assess your debt and begin the ten-year countdown on the CSED.

As the date of expiration draws near, the Internal Revenue Service efforts to collect from you will step up.  You will find it much more difficult to negotiate with them at this point, since they are running out of time.