IRC 6502: Statute of Limitations for Tax Collection and Tolling

The IRS has a limited time to collect unpaid taxes, but certain actions can extend this period. Understanding these rules is crucial for taxpayers dealing with unresolved tax liabilities or considering options like installment agreements or bankruptcy.

Statute of Limitations for Tax Collection

The IRS generally has ten years to collect unpaid taxes, starting from the date the tax was assessed. This period, established under Internal Revenue Code 6502, applies to most federal tax liabilities, including income, payroll, and estate taxes. Once this window closes, the IRS can no longer legally enforce collection through levies or court actions.

The ten-year clock begins when the IRS records the tax assessment, typically when a taxpayer files a return and the IRS processes it. If a return is audited and additional tax is assessed, the collection period starts from that date. If a taxpayer does not file, the IRS may create a Substitute for Return (SFR) based on available information, and the collection period begins once the IRS assesses the tax.

The IRS has various tools to collect unpaid taxes, such as wage garnishments and bank levies, but it must act within this statutory timeframe. If the IRS attempts to collect after the ten-year period expires, taxpayers can challenge the action. However, the IRS may still send notices or request voluntary payment, even if it no longer has legal authority to enforce collection.

Tolling Periods

Certain events can pause, or “toll,” the ten-year collection period, effectively extending the time the IRS has to collect unpaid taxes. These tolling events temporarily stop the clock, and once the event ends, the collection period resumes with the additional time added.

Bankruptcy

When a taxpayer files for bankruptcy, the IRS is prohibited from collecting debts due to the automatic stay under 11 U.S.C. 362. This stay prevents creditors, including the IRS, from pursuing collection actions while the bankruptcy case is active. The collection statute is suspended during the bankruptcy proceeding and for an additional six months after the case is resolved.

For example, if a taxpayer files for Chapter 7 bankruptcy and the case lasts eight months, the IRS collection period is extended by 14 months (eight months plus the six-month buffer). If the taxpayer files for Chapter 13, which can last three to five years, the extension could be significantly longer. However, not all tax debts are dischargeable. Income taxes may be eliminated if they meet specific criteria, such as being at least three years old and assessed at least 240 days before filing. Payroll taxes and recent tax liabilities typically remain collectible after bankruptcy.

Litigation

If a taxpayer disputes a tax liability in court, the collection period is paused while the case is pending. This includes cases in U.S. Tax Court, federal district courts, or the Court of Federal Claims. The tolling period lasts from the time the lawsuit is filed until the court issues a final decision, plus an additional 60 days.

For instance, if a taxpayer challenges an IRS assessment in Tax Court and the case takes two years to resolve, the collection period is extended by two years and 60 days. This extension allows the IRS to resume collection efforts if the court upholds the tax liability. Taxpayers should weigh the benefits of litigation against the potential for extending the IRS’s ability to collect, especially if they are nearing the end of the ten-year period.

Offer in Compromise

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the full amount owed. While the IRS reviews an OIC application, the collection statute is suspended. This tolling period begins when the IRS receives the offer and continues until a decision is made, plus an additional 30 days if the offer is rejected. If the taxpayer appeals a rejection, the tolling period extends until the appeal is resolved.

For example, if a taxpayer submits an OIC and the IRS takes 12 months to review it before rejecting the offer, the collection period is extended by 13 months (12 months plus 30 days). If the taxpayer appeals and the process takes another six months, the total extension would be 19 months.

Installment Agreements

When a taxpayer enters into an Installment Agreement (IA) to pay off tax debt in monthly payments, the collection period is generally not paused. However, if the IRS is reviewing a request for an IA or if the taxpayer defaults and requests a new agreement, the collection statute is suspended during the review process, plus an additional 30 days after a decision is made. If the taxpayer appeals a rejection, the tolling period continues until the appeal is resolved.

For example, if a taxpayer applies for an IA and the IRS takes four months to review the request before denying it, the collection period is extended by four months and 30 days. If the taxpayer appeals and the process takes another three months, the total extension would be seven months and 30 days.

Liens and Levies

A federal tax lien is a legal claim against a taxpayer’s property, ensuring the government’s interest takes priority over most other creditors. This lien arises automatically once the IRS assesses a tax liability and sends a Notice and Demand for Payment, but it becomes public when the IRS files a Notice of Federal Tax Lien (NFTL). Unlike a levy, a lien does not immediately seize assets but can complicate financial transactions by attaching to real estate, vehicles, bank accounts, and business assets.

A filed NFTL can make it difficult to secure loans or refinance a mortgage, as lenders often require lien resolution before approving financing. Additionally, when selling property, the IRS generally expects lien satisfaction from the proceeds before the seller receives funds. In some cases, taxpayers may request a lien discharge to remove the IRS’s claim from specific assets or a lien subordination to allow another creditor’s claim to take precedence, potentially helping with refinancing or business loans.

If the debt remains unpaid, the IRS can escalate collection efforts by issuing a levy, which allows the direct seizure of assets. The IRS may garnish wages, seize funds from bank accounts, or take physical assets such as vehicles and real estate. Before enforcing a levy, the IRS must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058 or LT11) at least 30 days in advance, giving taxpayers an opportunity to challenge the action or arrange payment alternatives.

Certain levies, such as wage garnishments, continue until the debt is fully paid or other arrangements are made. Unlike one-time bank account levies, which seize the balance available on the day of execution, wage levies take a portion of each paycheck indefinitely. The IRS follows specific exemption rules, allowing taxpayers to retain a portion of their earnings based on filing status and dependents.

Appeals and Administrative Actions

Taxpayers have the right to challenge IRS collection actions through administrative appeals. The IRS Independent Office of Appeals provides a platform for resolving disputes without litigation. Appeals officers review cases impartially, considering both IRS policies and the taxpayer’s position.

A common avenue for appeal is the Collection Due Process (CDP) hearing, available when the IRS issues a Final Notice of Intent to Levy or files a Notice of Federal Tax Lien. Taxpayers must request a hearing within 30 days of receiving the notice by submitting Form 12153. If the taxpayer disagrees with the outcome, they can escalate the matter to the U.S. Tax Court within 30 days of the determination.

Beyond CDP hearings, taxpayers may also request Penalty Abatement for relief from penalties due to reasonable cause, such as natural disasters, serious illness, or IRS errors. The First-Time Penalty Abatement program provides relief for taxpayers with a clean compliance history.

Possible Consequences for Unresolved Debts

Failing to address outstanding tax liabilities can lead to escalating consequences, from financial penalties to legal actions. The failure-to-pay penalty is 0.5% per month on the unpaid balance, capped at 25%, while interest compounds daily based on the federal short-term rate plus 3%. If a taxpayer repeatedly ignores collection efforts, the IRS may seize assets, garnish wages, or offset future tax refunds. In extreme cases, the IRS may pursue criminal charges for tax evasion, particularly if there is evidence of willful nonpayment or fraud.