IRS Collections Statute of Limitations | IRS Legal Defense

The IRS does not have an unlimited time in which they can assess tax penalties and take collections actions. The time limit in which the IRS can take action against a taxpayer is referred to as the “statute of limitations.” If the IRS does not take the relevant course of action within the timeframes listed below, their claim will be forever barred. However, be aware, that the law provides for certain events which can extend the IRS’s collections timeframe.

There are two relevant statutes of limitations that apply to IRS matters: the IRS Assessment Statute of Limitations; IRS Collections Statute of Limitations; and as mentioned, several actions that will extend (or “toll”) the statute of limitations (Collections Due Process, Offers in Compromise and Bankruptcy).

IRS Assessment Statute of Limitations

Three (3) years from the later of either: (i) the due date of the tax return, or (ii) the tax return filing date.

As an example: if your tax return is filed on March 1st, but has a due date of April 15th. The IRS assessment statute of limitations then starts on April 15th because the subject tax return was filed earlier than the due date. But, as you can imagine, most of the IRS tax help cases are from situations when the tax return is filed late (not early). So, if an IRS tax return is filed later than the due date, the IRS has three years from that late filing date before their statute of limitations to assess taxes owed.

Once the taxes owed is assessed by the IRS, there is also an IRS collections statute of limitations.

IRS Collections Statute of Limitations

Once the IRS tax assessment is done, then the IRS has a new collections statute of limitations, which is ten (10) years from the date of the IRS assessment to collect the taxes assessed.

to:  then the new IRS collection statute of limitations is ten (10) years from the date of the IRS assessment to collect the taxes assessed.

However, as you will see, 10 years doesn’t always mean 10 years. Sometimes the taxpayer will take actions that will toll / extend the statute of limitations from running out.

Events that will toll the IRS statute of limitations

How a collections due process request Impacts the statute of limitations

Going through Collections Due Process (CDP) tolls the IRS statute of limitations and tacks on an additional 30 days if the matter remains unresolved after the CDP process.

How an Offer in Compromise Impacts the IRS Collections Statute of Limitations

Asking the IRS for an OIC or “Offer in Compromise” tolls the IRS statute of limitations through the period in which the offer in compromise is being considered. Once an OIC is no longer pending, the statute of limitations period resumes and if the tax matter is unresolved, the statute of limitations period will be extended by an additional 30 days.

How Bankruptcy Impacts the IRS Statute of Limitations

If a taxpayer declares bankruptcy, an “automatic stay” will be issued that will prevent the IRS (as a creditor) from taking any further IRS collections actions until the automatic stay is lifted. If the automatic stay is lifted, and IRS lien has not been discharged, then the IRS can re-commence its tax collections activities and add back to the statute of limitations time frame, the amount of time the IRS was unable to act + 6 months (See When to Consider Bankruptcy to Help with IRS Tax Issues).

IRS Collection Notices

This article will review the various IRS collections notices a taxpayer might receive.

IRS Unpaid Tax Notices

The five types of unpaid tax notices you have likely received, that is causing you to research hiring an experienced IRS tax defense lawyer are: an IRS balance due notice; IRS important notice; IRS urgent notice; IRS refund levy; and a final notice - IRS intent to levy letter. Each are discussed in more detail below.

Balance Due Notice (CP-14)

If you file a tax return without paying the proper taxes, the IRS will first send a balance due notice on form CP14. All the IRS is doing is telling you what you owe on your recently-filed tax return. If the taxpayer doesn’t pay any or under-pays, the IRS balance due letter will be arriving shortly - letting the taxpayer know how much to pay, and when it must be paid. It also provides instructions for how to make a payment plan if unable to pay the full amount owed.

Do I owe interest or penalties once I’ve received an IRS balance due notice?

No. If you pay the full amount owed by the due date listed on the IRS Balance Due Notice, the IRS will not assess any penalties or interest on top of the actual tax owed. However, interest adds up after the date listed on the “IRS balance due notice” (CP14).

Important Notice (CP-501)

If you don’t pay the taxes owed, as shown in the balance due letter, the IRS, in short order, will send out an “important notice” on form CP501. The verbiage will be similar to that found on a CP14, except with slightly stronger language.

Do I owe interest or penalties once I’ve received an IRS Important Notice?

Yes. Interest will be tacked onto the outstanding balance until the taxes owed are paid in full. The IRS important notice will include a penalties section, which may be included as well. Talk to your IRS tax problem lawyer to discuss how to remove the IRS penalties.

If the taxes remain unpaid, in about 35 days you’ll receive an IRS urgent notice.

Urgent Notice (CP-503)

The IRS sends out an urgent notice letter as another reminder that the taxpayer still owes the IRS money and that it should be paid within 10 days or additional penalties and interest will be added. If there is still no payment on taxes owed, then the IRS sends out a CP504 / Refund Levy

Refund Levy (CP-504)

The IRS is informing the taxpayer that they intend to levy and will begin searching for assets on which to issue a levy. A Federal tax lien may also be filed to levy against:

  • Bank accounts
  • wages/income
  • Business assets
  • Personal assets (car/non-homestead homes)
  • Social security benefits

Receipt of an IRS refund levy notice is not the time to bury your head in the sand. It's time to reach out to an IRS debt lawyer right away.

Final Notice - Intent to Levy (Letter 1058 or LT11)

If you still haven’t responded to any of the above IRS letters, the IRS will issue Letter 1058 or LT11. At this point interest and failure to pay penalties are accruing and the IRS is about to commence its collections process.

Letter 1058 or LT11 will advise the taxpayer of their right to appeal/hearing - this is referred to as a Collections Due Process hearing (commonly referred to as “CDP”).

This notice will be sent 30 days before the IRS actually commences any attempt to levy. So if you have waited this long to get a lawyer to help with your IRS problem, wait no longer.

You want an IRS debt lawyer to help appeal the matter at this point because the IRS will not levy while the appeal is pending.

IRS Notice of Federal Tax Lien Filing (Letter 3172)

IRS Letter 3172 is sent out within 5 days of a federal IRS tax lien actually being filed against the taxpayer. You may be asking: “why don’t I get a ‘final notice’ of the government’s intent to file a tax lien as I might with a 1058 notice of intent to levy?” This is different than the IRS’s notice to levy because this letter is sent only after the IRS has filed their tax lien.

The IRS’s position is that they have already given the taxpayer notice that they have been deficient in paying owed taxes. They also view the filing of a federal tax lien as simply a protective measure not an IRS collections action (since it does nothing to actually take money from the taxpayer) it only protects their right to do so in the future.

IRS Statutory Notice of Deficiency

The IRS Statutory Notice of Deficiency (your tax lawyer may refer to it as a “NOD,” “Stat Notice,” or “90 day letter”) is a very important notice to bring to your IRS tax help lawyer because it sets forth the IRS’s position on what you, the taxpayer, actually owes the IRS. An actual dollar amount will be provided on the IRS notice of deficiency. If you disagree with what the IRS believes you owe in taxes, the notice of deficiency provides that you have 90 days to file a tax-court petition.

When a tax-court petition is filed, you don’t actually go directly to tax court (usually). Rather the tax court will likely refer the matter to the IRS tax appeals division for handling by an IRS appeals officer. IRS tax appeals tries to get matters resolved to prevent them from having to go to actual tax court.   

Differences between an IRS Lien and IRS Levy

There are really important differences between an IRS Levy and and IRS Lien. An IRS lien is a measure taken by the IRS to protect the value of the debt it believes it is owed.  The government doesn’t actually take anything from the taxpayer by virtue of the fact that an IRS tax lien has been filed. An IRS tax lien just secures its places and indicates a willingness of the government to take action against the value of the taxpayer’s property to force the taxpayer to pay the IRS lien.

IRS Lien | Federal Tax Lien

The IRS lien is created immediately when the taxes have been assessed (even if the IRS tax lien is not filed / published / recorded in the public record until later). An IRS may file a federal tax lien even when the taxpayer thinks collections activities have stopped. For example, even if the taxpayer is on a payment plan, the IRS may send Letter 3172 and file a lien just to protect its interest in case the taxpayer should ever fail to make agreed-to payments.

The IRS lien applies to everything the taxpayer owns, after the tax lien is filed, and anything the taxpayer acquires after the tax lien has been filed/recorded.

IRS tax liens may be withdrawn, subordinated discharged or released.

IRS lien release

The IRS may release its lien for a few reasons. The most common reason for the IRS to release a tax lien is after payment has been made on taxes and penalties owed to the IRS.

IRS Lien Discharge

The IRS tax lien may discharge its lien on a particular piece of property to allow the taxpayer to sell the property (it won't be sellable if there is a recorded tax lien) if the IRS believes it will help the taxpayer be more likely to pay off their IRS debt.  

IRS Lien Subordination

The IRS may also allow their lien to be subordinated (lower their place in the payback line) if the IRS tax lawyer can convince them that it is in the IRS’s best interest. An example is, again with property, perhaps the taxpayer can get a mortgage on the property and use the equity to pay off the tax lien.  The IRS may agree to this sort of a deal if all (or a significant portion) of the newly-borrowed money is going to them.

IRS Lien Withdrawal

The IRS may withdraw their federal tax lien, which eliminates all filings and is the only way to erase it from the taxpayer’s credit record. If the taxpayer qualifies for IRS lien withdrawal, the IRS will actually send the notice of withdrawal to the three main credit bureaus.

A lien typically wont be filed until it reaches $10,000.00. After the taxpayer starts a direct debit payment installment agreement, and the lien is less than $25,000 (or paid off and you now owe less than $25,000), the taxpayer will be able to request “Withdrawal of Notice of Federal Tax Lien”), if the direct debit installment agreement provides for payment in full within 60 months or when the IRS statute of limitations expires, if earlier and have made 3 months worth of payments on the IRS installment agreement.

IRS Levy | IRS Seizure

The IRS levy is a more serious effort by the IRS because unlike the recording of an IRS tax lien, an IRS levy or seizure is when the IRS actually takes something from the taxpayer (property, wage garnishment). IRS levy typically refers to cash (i.e. from wage garnishment, investment account). IRS seizure is a type of levy that typically refers to when the IRS takes something tangible (i.e. a car or real estate).

IRS Wage Garnishment

IRS can levy against a taxpayers wages by sending a letter to the taxpayer’s employer and directing the to take a certain amount out of the taxpayer’s paycheck for each pay period until the federal tax lien is satisfied. Here is the IRS Chart that Shows What is Exempt from IRS Wage Garnishment, everything above amount listed in chart will be going to the IRS continuously until the lien is paid off.

The IRS wage levy is a “continuous levy” - the wages will continuously be garnished per pay period until the IRS lien is satisfied. This is different to the IRS levy of a bank account or investment account, which are one-time levies (not continuous).

IRS Levy of Bank or Brokerage Account

When the bank or other financial institution receives a IRS levy notice, only the amount in the financial account, on the date the notice is received, is subject to the IRS levy. So if a brokerage house receives a notice of IRS levy on January 1, and a deposit is made on January 2nd, only the amount in the account on January 1 is subject to being levied.

The bank will hold the amount levied for 21 days. If the taxpayer has not done anything to get the IRS levy released within that 21 day period, the financial institution will transfer the amount being held to the IRS.

What happens frequently is that bank policy (not IRS law) will freeze the entire account until the IRS tax levy is dealt with. If the IRS levy amount is substantially less than the value of the account (again, perhaps because of a subsequent deposit), the taxpayer may ask the bank to release the levy amount to the IRS prior to the 21 day period so that they can access their subsequently-obtained funds.

Can I file and appeal after the IRS has commenced levying?

Yes, generally filing for an appeals hearing will stop the IRS’s levy efforts (referred to as an “equivalency hearing” if its file within 1 year of the date of the 1058 (IRS intent to levy) letter. The only difference (and reason why you don’t want to wait this long) is that the taxpayer has no right to appeal the results of an equivalency hearing to tax court (the way you do if you appeal within 30 days per the 1058 letter).

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