CSEDs – Part II

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I have written about CSEDs before.  These are the statute of limitation periods in tax cases; the “Collection Statute Expiration Dates.”  In a previous blog post, I listed what kinds of events can suspend the CSED.  Here I would like to address a couple additional details.

1. Waivers / Extensions (IRM 5.1.19.1)

If you are asked to sign a CSED waiver or extension, you are essentially agreeing to give the IRS additional time (beyond the standard 10 years) to collect the tax from you.  You are giving up the tax relief available to you at the end of the tunnel.  Before the 1998 tax reform, IRS revenue officers were essentially free to secure CSED waivers under any circumstances imaginable.  Also, there were no restrictions on how many waivers could be obtained from the same taxpayer or how far into the future the CSED could be extended.  Today CSED waivers have gone almost completely out of fashion, although some are still obtained in connection with installment agreements as required by law.

2. Substitute for Return (IRM 5.1.19.3.15)

A Substitute for Return (SFR) is an IRS-filed return that leaves out important exemptions or expenses you may be entitled to and may overstate your real tax liability.  Some believe that if a taxpayer goes back and files his own original return, this action automatically resets the CSED for that particular tax year.  This is not necessarily the case.  If the original taxpayer-filed return results in a lower liability, the original CSED remains intact.  And if the original return results in a higher liability, the CSED is updated (extended) only on the additional assessment.  A fine distinction, but an important one nonetheless.

"Collection Statute Expiration Dates"

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photo via wastedfood.com

Many of our tax relief clients know from personal experience that the IRS can very persistently chase taxpayers around for years trying to collect what is owed.  But the Statute of Limitations (SOL) prohibits the IRS from pursuing a taxpayer indefinitely.  Once the SOL is up, the tax debt “expires” and the IRS can no longer collect the debt.

The SOL for collection of a back tax debt is 10 years from the date of assessment.  Since each tax period/form is filed and assessed on different dates, each tax period normally has a different expiration date.  In the jargon of IRS Collections, this is called the Collection Statute Expiration Date (CSED).   See IRS Pub 594 for further details.

In a perfect world, a 2008 tax return is filed and assessed in April 2009 and then expires in April 2019.  However, there are a number of events that can toll (or extend) the SOL on a back tax debt:

  • IRS investigation of a request for Installment Agreement
  • IRS investigation of an Offer in Compromise
  • Appeals determination
  • If you live outside the US for a period of 6 months or more
  • Bankruptcy (SOL tolled while the automatic stay is in effect)
  • IRS Collection Due Process hearing
  • Tax Court Proceeding
  • Request for Innocent Spouse Relief

Some of these procedures can last several months, which automatically adds the same number of months to the SOL.  Anytime a taxpayer is considering one of the listed procedures, he/she should also take into account how it will affect the CSEDs.  An experienced tax attorney can help with this important analysis.

IRS Audit Issue Going to Supreme Court

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If the IRS is thinking about auditing you, they currently have 3 years from the date your return is filed to decide. It’s called the Assessment Statute Expiration Date (ASED). There is an exception: in cases where the taxpayer omits 25% or more of his gross income, the IRS has 6 years to initiate an audit.

A number of lower courts have ruled one way or another on what constitutes a 25% income omission, and now the US Supreme Court has agreed to review the issue. Of course the IRS would like as much time as they can get, so they argue for a liberal interpretation. They argue that anything having the same effect as a 25% income omission (like an overstated tax basis) should result in a 3 year extension of the statute.

The case that the Supreme Court agreed to hear is Home Concrete & Supply v. U.S.. We need to keep an eye on this one. Currently it is not very common to see tax liabilities going back more than 10 years. The Collection Statute Expiration Date (CSED) on federal tax liabilities is 10 years; after that, the liability drops off the books. But the clock starts to run when the liability is assessed, so if the IRS waits 3 years to conduct an audit and assess the tax on your 2005 return, it would expire (at the very soonest) 13 years later — in 2019. This is assuming the return was filed on time (April 2006) and no other clock-stopping events have occurred in the interim.

If the Supreme Court rules in favor of the IRS, then we could start seeing more 16-year-old liabilities here and there.

Partial Payment Installment Agreements

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Most IRS installment agreements are set up so that the payments will satisfy the total amount due before the Collection Statute Expiration Date (CSED), affording minimal tax relief to the cash-strapped taxpayer. However, in some situations this is not possible. Sometimes the taxpayer’s financial situation is such that the debt will not be satisfied before the CSED, even if minimum monthly payments are consistently made. This is called a Partial Payment Installment Agreement (PPIA).

For instance, suppose the taxpayer owes $10,000 for tax year 2001 and the financial statement reveals that the highest payment that can be made is $100 per month. If the 2001 liability expires in 36 months, then taxpayer will pay only $3,600 over the life of the statute. Obviously the IRS does not like to enter into these types of arrangements unless absolutely necessary. Here are some of the PPIA prerequisites:

  • All back tax returns filed
  • No equity in assets (or assets liquidated and paid to the IRS prior to PPIA approval)
  • Full Collection Information Statement (IRM 5.14.2)