For those beleaguered souls for whom nothing else works, the only hope of relief from unmanageable federal tax debts may be the statute of limitations on collection. In theory, the IRS has only 10 years from the date of assessment to collect. However, this 10-year limitation is shot through with so many exceptions, waivers and overlapping extensions that in all but the simplest of cases computing the correct “collection statute expiration date” (or CSED in IRS-speak) is quite difficult. Nevertheless, thorough planning requires an understanding of how the statute of limitations applies to each client’s case, and a consideration of the statute of limitations consequences of other actions, such as filing an offer in compromise, requesting an installment agreement, seeking a collection due process hearing, or filing a petition in bankruptcy. The IRS Restructuring and Reform Act of 1998 (RRA) made substantial changes related to the statute of limitations, and pursuant to one unheralded provision many “voluntary” statute extensions previously extracted from delinquent taxpayers will expire as of December 31, 2002, only a few months from now.
A 10-year limit . . . maybe
The general statute of limitations rule is found in IRC §6502(a)(1), which provides that “(w)here the assessment2 of any tax imposed by this title has been made . . . such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun within 10 years after the assessment . . .”3 If that was the whole story, life would be simple. But as we will discuss, there are exceptions, and then exceptions to the exceptions. The following are some of the more common statutory extensions4 of the limitations period:
- The time during which the taxpayer’s assets are under the control or custody of a state or federal court, plus 6 months. §6503(b).
- The time during which the taxpayer is outside the U.S. for a continuous period of at least 6 months, and for 6 months after his return. §6503(c).
- The time the IRS holds property wrongfully seized from a third party, or during which it wrongfully has a lien in place against the property of a third party, plus 30 days.5 §6503(f).
- The time when collection action is barred because the taxpayer is in bankruptcy, plus 6 months. §6503(h).
In addition, an extension of the limitations period can result from a voluntary agreement between the taxpayer and the Service (e.g. the execution of a Form 900 Tax Collection Waiver), or as a consequence of the taxpayer’s voluntary action in invoking other collection-related procedures. These include the following:
- Requesting a Collection Due Process (CDP) Hearing, or seeking judicial review of the results of a hearing. §6330(e)(1).
- Seeking protection from a joint income tax liability as an “innocent spouse” under §6015(b) or §6015(c).6 §6015(e)(2).
- Filing an offer in compromise, or pursuing the administrative appeal of the rejection of an offer in compromise. §6331(i)(5).
- Requesting an installment agreement, or filing an appeal of the rejection of an installment agreement request. §6331(k)(2).
- Filing a Request for Taxpayer Assistance Order with the Office of the Taxpayer Advocate. §7811(d).7
Voluntary statute waivers
Prior to the RRA, the most common reason for an extension of the statute of limitations was the Service’s request that the taxpayer enter into a “voluntary” waiver agreement. The implicit threat was that refusal to execute the waiver would result in the commencement or continuation of levy action, and taxpayers were understandably reluctant to refuse. The RRA, however, severely narrowed the circumstances in which the IRS can request waivers.8 A waiver can now be sought only in two situations:
- In connection with an agreement between the taxpayer and the IRS to release a levy after the expiration of the otherwise applicable limitations period; and
- In connection with an installment agreement the payments under which would extend beyond the otherwise applicable limitations period.9
Termination of statute waivers
To go along with the new restrictions on seeking statute waivers, the Congress decided that previously obtained waivers should be terminated after a reasonable transition period. The result is §3461(c)(2) of the RRA, which provides that where a taxpayer agreed to extend the statute of limitations on or before December 31, 1999, the extension so granted will terminate on the latest of the following three dates:
- the last date of the normal 10-year statutory period;
- December 31, 2002; or
- in the case of an extension entered into in connection with an installment agreement,10 the 90th day after the end of the extension period.
The IRS has not had the time, the computers, or the staff to go through its inventory of delinquent accounts to update the CSEDs for the impact of the RRA §3461(c)(2) sunset rule.11 Hence, practitioners with clients facing liens or collection action on old tax debts will do well to carefully examine the computation of the CSED to see if the liabilities will soon be time-barred. The statute of limitations is an affirmative defense which must be raised by the taxpayer, so it would not be prudent to rely solely on the hope that the IRS will magnanimously reach out to share the happy news that your client’s tax debts are no longer legally enforceable.
The relationship between installment agreements and the statute of limitations warrants further discussion for two reasons: First, installment agreements are frequently used and therefore affect many taxpayers. Second, the RRA changes to the Code were so confusing and internally inconsistent that a technical correction provision had to be passed two years later in the Community Renewal Tax Relief Act of 2000 (CRTRA)12, and in the interim the IRS had to reconcile the conflicting positions by administrative policy.
Here’s the problem: As noted above, the RRA amended §6502 to eliminate the IRS’s ability to seek statute waivers except in two narrow situations, one of which involves installment agreements. But the RRA also amended §6331(k)(2) and §6331(k)(3). The changes to §6331(k)(2) had the effect of prohibiting collection by levy while a request for an installment agreement was pending, or while an agreement was in place, or during the period after the IRS notified the taxpayer of its intention to terminate an agreement and during any appeal of such termination. And §6331(k)(3) as amended tolled the statute of limitations for any period during which collection by levy was barred. So, if for the entire life of an installment agreement the statute of limitations was automatically extended, what pray tell was the purpose of explicitly permitting the IRS to request a voluntary statute waiver in connection with an installment agreement? This inconsistency was addressed by the CRTRA technical correction. But pending this legislative fix, the IRS chose to simply ignore the automatic tolling provisions of §6331(k)(3) covering the time during which an installment agreement is in force:13
The Service, as a matter of policy, never adopted this suspension period. Instead, the Service considered only a valid waiver via Form 900 as extending the CSED. In any case, this statutory exception was recently removed by a technical correction in section 313(b)(3) . . . Effective December 21, 2000, the statute of limitations for collection after assessment will not be suspended because the Service is prohibited from levy.
So despite the legislative authority under the RRA to have the statute of limitations automatically extended for the entire life of an installment agreement, it seems the IRS preferred to rely on its time-honored method of extending the statute through signed waiver agreements. And by technical correction the Congress changed the law to conform to IRS administrative practice. The effect of §6331(k) as thus revised is to extend the statute for the time an installment agreement request is pending, and for the time during which the administrative procedures for terminating an agreement are being pursued, but not for the entire time the agreement is in force. If the IRS wants a statute extension because the anticipated term of an installment agreement would carry it beyond the CSED, it must “ask” the taxpayer to sign a Form 900 Tax Collection Waiver.14
Current IRS rules regarding the extension of the statute of limitations in the context of installment agreements are set forth in the Internal Revenue Manual.15 First, the Manual notes that if the installment agreement will full pay the tax prior to the CSED, no statute waiver need be secured. However, consistent with §6159(a), the Manual also provides that a waiver must be obtained if the installment agreement will extend beyond the CSED. Finally, as required by §6502, the Manual states that “waivers should only be secured when a new agreement is established.” By IRS policy, such extensions are to last not more than 3 months beyond the date the installment agreement would full pay the tax, and in no event more than 5 years, and the period for collection may be extended only once per tax period.16
Offers in compromise
Another source of great confusion in computing statute of limitations bar dates involves offers in compromise. For many years the IRS Offer in Compromise form (Form 656) contained a provision stating that by submitting the offer the taxpayer agreed to waive the statute of limitations for the time the offer was under consideration by the Service, plus an additional year.17 The waiver period was deemed to begin not on the date the offer was mailed to or received by the Service, but rather on the date an appropriate IRS official signed the Form 656 indicating that it had been received and was deemed “processable.”
Effective January 1, 2000, the RRA codified the Service’s policy of withholding collection action while an offer in compromise is under review.18 And since levy and distraint action is barred, the statute of limitations is also tolled for the period the offer is pending, plus 30 days.19 Accordingly, the language requiring the taxpayer to agree to an extension of the statute of limitations on collection has been removed from the current (May 2001) version of Form 656. Thus, both before and after January 31, 2000, the statute is tolled for the time the offer is under review, but the rules now tack on only an additional 30 days, not an additional year.
Finally, the changes in the statute of limitations rules will make a difference in the case of a defaulted offer in compromise. The compromise agreement requires that the taxpayer file all returns and pay all taxes due for five years after the offer is accepted. Sadly, some taxpayers have difficulty altering their habits enough to avoid once more becoming delinquent, and thus default on the future compliance terms of their offers. And when this happens, the compromised tax debts spring back to life. Prior to the RRA changes, the statute was waived for as long as any condition of an accepted offer remained unsatisfied. And since one of those conditions was five years of future compliance, this had the effect of protecting the statute of limitations for that five year period as to any tax debt covered by the offer in the event of a default. Because of the RRA changes, that waiver provision has been removed from the current version of the Form 656. The February 1999 version still contained the waiver language, but clearly stated that it would have no effect after December 31, 2002. Now it would appear that the statute of limitations on collection will start running again 30 days after the acceptance of the offer (since it would no longer be “pending”). Thus, it is possible that if there is a default during the five year future compliance period, some of the tax debts may be too old to be collected, despite the default.
Trying to understand the simultaneous and overlapping effect of all these rules would leave a Talmudic scholar cross-eyed. For example, how is the December 31, 2002, statute extension sunset requirement applied to the waiver provisions of an offer in compromise which was filed under the old rules, but which was still pending after January 1, 2000? Are the two kinds of waivers added together? In a memo responding to questions raised by the Rocky Mountain District, the Chief Counsel’s Office tried to address these issues . . . and not unexpectedly it concluded that all available waivers and statutory extensionsshould be added together, in order, so as to result in the longest possible extension of the statute of limitations. The following series of examples is patterned on those presented in the Chief Counsel’s memo20 illustrating the legal position the IRS has adopted:
Prior to December 31, 1999, the taxpayer executes, and the IRS accepts, a Form 900 Waiver extending the statute to March 31, 2001. On June 1, 2000 (within the statute as extended), the taxpayer files an offer which the IRS accepts as processable the same day. The offer is rejected on July 30, 2000, i.e. 60 days after it was filed, and the taxpayer does not appeal.21The offer extends the statute for 90 days (60 days pending, plus 30 days). This 90 days isadded to the date certain specified in the Form 900 waiver, i.e. March 31, 2001, thus resulting in a new CSED of June 29, 2001.
For offers filed in 1999 or before, the Chief Counsel memo asserts that the additional one year waiver period which was specified in the old Form 656 will still be valid, and will be the starting point for any extension resulting from the application of the RRA provisions effective January 1, 2000. This is shown by the net result of the following two examples:
Step 1: The taxpayer files an offer on September 1, 1999, and the offer is deemed processable the same day. The statute on the taxes in question, but for the offer, would have expired February 1, 2000. The waiver provision in the old Form 656 would extend the statute for the 4 months the offer was pending through December 31, 1999, plus one year, or a total of 16 months. Adding 16 months to the original CSED of February 1, 2000, yields a new CSED of June 1, 2001.
In other words, the statute is tolled by the pendency of the offer, but only up to December 31, 1999, and then the additional one year is tacked on to whatever CSED would otherwise result.
Step 2: Treating the June 1, 2001, extended CSED above as a date certain, the new RRA rules are then applied to further extend the statute for whatever period of time the offer is under consideration starting with January 1, 2000, plus 30 days. Assuming that the offer above is rejected on June 1, 2000, and no appeal is taken, the statute would have been suspended for 5 months after January 1, 2000, plus an extra 30 days. Adding this time to the June 1, 2000, date as determined above would yield a new CSED of December 1, 2000.
Finally, introducing the RRA sunset rule to the analysis in a footnote, the Chief Counsel memo argues that if the waiver provision in the old offer in compromise would lead to a CSED after December 31, 2002, its effect would have to be cut off as of that date. December 31, 2002, would then be treated as the date certain in the two examples above, and thus as the starting point for applying any extension resulting from the new post-December 31, 1999, RRA statute tolling provisions.
Trying to divine a general rule from all of this, it would appear that all pre-2000, waivers are to be given effect, but only up to the statutory sunset date of December 31, 2002. Then, starting with this date, any post-1999, extensions are tacked on. The fact that this double-counts any period of tolling starting after 1999 doesn’t seem to bother the Chief Counsel’s Office. Whether this analysis is accepted or rejected by the courts will be decided in future cases. However, when advising clients, or negotiating with the IRS about lien releases and other issues impacted by these rules, it would be best to follow the obviously pro-IRS analysis of the Chief Counsel’s Office unless and until the courts find that another interpretation is more appropriate.
When you reach the end, it still may not be over
Even if the CSED is just around the corner and the taxpayer doesn’t take any of the actions that would extend it, the IRS still isn’t out of options. There are at least two ways for the Service to protect itself.
First, assuming there are assets worth grabbing, the IRS can serve a levy. In a rule analogous to that applicable to installment agreements, §6502(a)(2)(B) permits the IRS to enter into a statute of limitations waiver agreement if
. . . there is a release of levy under section 6343 after such 10-year period, prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before such release.
It remains to be seen how the IRS will implement this portion of its diminished authority to seek statute waiver agreements.
Second, just as before the 1998 Act, the IRS can file suit in state court. Two kinds of actions are available.22 A suit to foreclose a tax lien is used “where there is a specific, presently available source of collection,” whereas a suit to reduce a tax claim to judgment is used “to extend the collection period where there is no source of collection currently available.”23 Where appropriate, both remedies can be sought in the same suit. The Service, however, is quite careful in the use of its limited legal staff, and few such suits are actually filed. The Internal Revenue Manual contains extensive guidance as to the conditions which warrant recommending suit, as well as a list of the data which the Revenue Officer must submit to District Counsel.24 The factors to be considered include the cost of bringing the action, the likelihood and expected amount of any recovery, and the claims of parties holding competing liens. Focusing on these factors, you may be able to argue that the situation doesn’t meet the applicable criteria, and that suit should not be filed.
The statute of limitations is an important consideration in determining how best to resolve the problems of any client with unmanageable tax debts. Obviously, those who can pay their taxes should pay, and the IRS is well-equipped to encourage them to do so. But for those who truly cannot pay what is owed, the law strikes an appropriate balance by allowing such liabilities to eventually die off so that the IRS can stop carrying uncollectible accounts and taxpayers can get on with their lives. As tax professionals we need to understand these rules so we can fully and accurately inform our clients of their rights and options.
1 Mr. Haynes is an attorney with offices in Burke, VA, and Burtonsville, MD, and is a member of the Maryland Society of Accountants’ Newsletter Committee. From 1973 to 1981 he was a Special Agent with the IRS Criminal Investigation Division in Baltimore, and in 1980 was named “Criminal Investigator of the Year” by the Association of Federal Investigators. He specializes in civil and criminal tax disputes and litigation, IRS collection problems, and the tax aspects of bankruptcy and divorce. (phone 703-913-7500; website www.bjhaynes.com)
2 Normally the assessment date is clear. However, there has been confusion as to a “substitute for return” assessment if the unfiled return is later filed, because the IRS recalculated the CSED starting from the later assessment (i.e. the one triggered by the filing of the missing return). Recently, the IRS Chief Counsel’s Office concluded that this was wrong, and that the earlier SFR assessment date should control for limitations purposes. ILM 200149032 (10-22-2001).
3 Maryland has a 7-year limitation on the collection of most taxes (Tax-General Art. §13-1103), but once a lien has been filed no limitations period applies. Rossville Vending v. Commissioner, 114 Md. App. 346, 689 A.2d 1295 (1997). D.C. has a 10-year limitations period (D.C. Ann. Code §47-1812.10(d)), but also asserts that a filed tax lien survives the running of the statute. Given that the tax liens survive indefinitely, the statutes of limitations are effectively meaningless, and the underlying taxes are collectible forever.
4 A brief primer on terminology: We will talk about two ways in which the statutory limitations period can be enlarged — by a waiver or extension to a future date certain, or by an extension for a period of time determined by reference to some other event. While the clock is in motion the statute is said to be “running,” and when it has reached its end it has “run,” culminating in the “statute bar date.” And the statutory clock is said to be “tolled” by an event which stops it for some period of time. Confused? Yea, me too.
5 The extension applies only to a portion of the assessment equal to the value of the money or other property returned to such third party, or wrongfully subjected to the lien.
6 In contrast, a request solely under §6015(f) does not extend the statute of limitations.
7 See also IRM 188.8.131.52.4.4 (10-1-2001).
8 The final position taken in the RRA was a legislative compromise. The Senate would have entirely eliminated the IRS’s ability to seek extensions of the statute of limitations!
9 When such a waiver is obtained, the statute is extended to the date set forth in the waiver, plus 90 days. §6502(2)(A).
10 Clearly, determining whether any particular statute waiver was or was not granted “in connection with an installment agreement” will be crucial. Related to this, in the past some IRS offices had an unseemly habit of terminating or threatening to terminate installment agreements merely to force taxpayers who were otherwise in full compliance to sign statute waivers. In June 1998, the IRS apologized for terminating some 20,000 installment agreements for this reason, and ordered the revocation of any waivers thus obtained. IRS News Release #IR-98-44.
11 IRM 25.6 (10-1-1999) establishes a “Statute of Limitations Project” to deal with limitations issues with regard to assessments, refunds, credits and collection.
12 Even the CRTRA revision wasn’t sufficiently clear, and an additional technical correction was added by the Job Creation and Worker Assistance Act of 2002.
13 ILM 200119054 (3-19-2001).
14 Note that even the technical corrections leave a hole in the statutory fabric. The RRA changes were effective for all installment agreements in force on December 31, 1999, and entered into thereafter, whereas the CRTRA technical correction is effective only after December 21, 2000. This would seem to leave a 355 day period during which the statute would be tolled despite the Service’s stated policy of ignoring §6331(k)(3).
15 IRM 184.108.40.206 (10-18-1999).
16 These limitations are IRS administrative policy only, and are not mandated by the Code as amended by the RRA and the CRTRA.
17 This was said to be justified by the Service’s policy of withholding collection action while an offer in compromise was under consideration. IRS Policy Statement P-5-97 (1959), and Regs. §301.7122-1(d)(2) (1960).
20 ILM 200046036 (9-20-2000).
21 Time out for a reality check. These facts are obviously simplified to help illustrate the salient points. In practice, an offer would never be deemed processable the same day it was filed, nor would an offer be rejected on its merits in 60 days. The IRS is so swamped with offers, and so understaffed to work them, that a delay of 12 to 18 months for the substantive review of an offer in compromise is not uncommon.
23 In addition, it is also possible that the IRS may have obtained a promissory note secured by a mortgage or deed of trust. This sometimes occurs pursuant to a collateral agreement in connection with an offer in compromise. Such a promissory note provides an alternative means of collection, giving rise to a cause of action on the note itself and thus not linked to the statute of limitations on the underlying tax. A discussion of the case law can be found in ILM 200133028 (7-17-2001).
24 IRM 220.127.116.11.2 (9-20-2000).
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