IRS 10 Year Rule: What Taxpayers Need To Know
TABLE OF CONTENTS
Key Takeaways:
- The IRS 10-Year Rule, known as the Statute of Limitations, is the 10-year period during which the IRS can collect unpaid tax debt before the debt automatically expires.
- The Collection Statute Expiration Date (CSED) is the date when a taxpayer’s tax debt automatically expires, falling 10 years after the tax assessment initiating the Statute of Limitations period.
- The 10-year Statute of Limitations period may be extended during circumstances such as appeals filing, bankruptcy filing, leaving the country for 6 months, filing a lawsuit against the IRS, offer in compromise filing, military deferments, or signing a waiver and agreeing to extend the CSED.
What Is The IRS 10 Year Rule?
The IRS 10-year rule, or the Statute of Limitations, describes the 10-year period the IRS has to collect unpaid tax debt. Following the end of the 10-year period, the IRS can no longer initiate collection efforts for unpaid taxes, and the debt is written off from their tax history.
The IRS intentionally denotes specific and complicated rules regarding the Statute of Limitations that are difficult to understand because if more taxpayers knew about this rule, it would result in the IRS receiving fewer payments for taxes. Additionally, when this ten-year period is nearing its end, the IRS will likely initiate more aggressive forms of collection in an attempt to secure payment for unpaid debts, such as applying tax liens to their assets.
There are instances in which waiting out the IRS may be the most beneficial approach for taxpayers, as their tax debt is removed and they have a clean slate for the next tax year. However, 10 years is a long time, so taxpayers may struggle to continue with the responsibilities of their daily life while the IRS attempts to secure tax payments. For this reason, hiring a tax expert to advise them on the best approach to managing their back taxes can be the wisest choice to ensure they save the most money and reduce their chances of experiencing financial hardship.
When Does The Statute Of Limitations 10-Year Period Begin?
The IRS 10-year Statute of Limitations period begins on the date after filing taxes when the taxpayer’s federal income tax return is officially assessed by the IRS and the outcome is documented in the books. After the Statute of Limitations of 10 years, the IRS can no longer utilize collection efforts to secure payment for unpaid taxes.
One issue that tax debtors sometimes face when dealing with a tax burden is that the IRS may calculate the beginning of the Statute of Limitations period differently, resulting in a dispute. A common circumstance causing this confusion is in the case that the taxpayer had previously failed to pay their tax liability or only submitted a partial payment for their tax bill, especially if this underpayment of taxes occurred over several tax years.
It can be beneficial to consult with a tax professional to learn exactly when their tax debt expires and to ensure the IRS agrees with the Collection Statute Expiration Date.
What Is The Collection Statute Expiration Date (CSED)?
The Collection Statute Expiration Date (CSED) describes the end of the 10-year Statute of Limitations period, after which, the IRS can no longer legally collect payments for tax debts.
How Will I Know That The 10-Year Statute Of Limitations Period Is Over?
Due to the fact that the end of the Statute of Limitations period will result in the taxpayer’s debt being wiped clean and they will no longer owe money to the IRS, taxpayers will not be informed when the CSED has passed. Therefore, it is the sole responsibility of the taxpayer or their hired tax professional to calculate the expiration date of the Statute of Limitations as well as secure documentation from the IRS that they no longer have unpaid tax debt.
Can The Collection Statute Expiration Date Change?
While the Statute of Limitations period begins at the date of their initial tax assessment, there are circumstances that can result in “tolling the statute of limitations,” or the temporary pause of the 10-year period and therefore delay in the CSED. When the CSED is approaching, the IRS will often offer tax settlement options to the taxpayer as an attempt to collect a portion of the tax debt amounts before the 10-year period is over. While this may seem like an attractive option, settling with the IRS will sometimes require the taxpayer to agree on an extension of the statute length.
Some of these events that can result in the clock being paused include:
- Filing for appeals
- Filing for bankruptcy
- Leaving the country for at least half of the year, or 6 months
- Filing a lawsuit against the Internal Revenue Service
- Filing for an offer in compromise
- Military deferments
- Signing a waiver and agreeing to extend the CSED
Following these events, the clock representing the 10-year Statute of Limitation period will resume, but at different rates depending on the reason the clock was paused. While some of these events will result in the clock being resumed immediately after, others, such as filing for bankruptcy, will result in the clock being paused for up to 6 months after settlement.
IRS Tax Debt Strategies
When a taxpayer has an unpaid tax liability and the CSED is approaching, the IRS may offer “deals” through the IRS Fresh Start Program that allow them to pay back what is owed before they move on to more severe tax collection efforts. It can be challenging to understand which approach would be beneficial for each tax situation, so consulting with tax professionals for guidance can be instrumental in navigating the tax debt settlement process.
Waiting For The CSED
The first approach to managing tax debt is for the taxpayer to wait out the 10-year Statute of Limitations period. While this approach can be beneficial as the taxpayer is fully excused from their unpaid tax debts, the IRS will likely initiate aggressive tax collection efforts during that period that makes it near impossible to manage their finances and lifestyles.
For example, the IRS can place federal tax liens on the taxpayer’s assets, such as their home or property, and then levy and sell the asset to apply the profit towards the unpaid tax debt. The IRS may use wage garnishment and instruct the taxpayer’s employer to send their earnings directly to the IRS for tax payments instead of issuing the funds in their paychecks.
Installment Agreement
The IRS may offer taxpayers approaching their CSED to settle their debt with an installment agreement, a form of tax relief that allows taxpayers to pay back their tax debt in monthly payments, known as installments, rather than paying back the full sum of their debt in one lump sum.
This could be beneficial for taxpayers who are nearing the end of their Statute of Limitation period, as a strategic installment amount could result in them paying less than what they initially owed in taxes. However, installment agreements do not directly prevent the IRS from pursuing other collection methods, such as tax liens.
Offer In Compromise
Taxpayers who cannot afford to pay their tax debt while still being able to afford their basic living expenses may be eligible to negotiate with the IRS and settle their tax debt for a lower settlement amount, known as an offer in compromise.
While this can be beneficial in lowering the taxpayer’s tax bill, agreeing to an offer in compromise often results in the extension of the 10-year Statute of Limitations period.
Currently Non-Collectible Status
If taxpayers cannot reasonably afford to make any payment towards their tax debt as well as their basic living expenses, a tax relief professional could present a financial hardship case to the IRS and request the currently non-collectible (CNC) status be placed on their account. During this time, the IRS must stop all tax collection procedures, including tax liens and wage garnishment, allowing the taxpayer time to regain financial stability.
While it is rare to be approved for IRS hardship status, it is beneficial to note that the Statute of Limitations period continues to run during the period CNC status is placed on the taxpayer’s account, so if the IRS fails to collect the back taxes, after this 10-year period, the tax debts will automatically expire.
If you have unpaid tax debt and are unsure about which tax debt relief strategy would best benefit your tax situation, the tax debt attorneys at Ideal Tax can help determine when your Statute of Limitations period ends, if it would be advisable to wait until your tax debt has expired, or if you should utilize a different tax debt relief option.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
