Best Time To File Old Taxes? NOW!

Believe it or not, the percentage of the taxpaying population who files late or doesn’t file at all is substantial.  There have been several statistics that indicate that eleven to fourteen million taxpayers fail to file their returns on time.  This could mean they do it months, if not years after the April 15th deadline.  The reasons for filing late are all across the board.  They range from forgetfulness and confusion on what to do to, all the way up to not sure how to pay a balance, to destruction of records.  No matter what the reason, we’re going to discuss why now (through say 2021) is the best time to file those old tax returns you’ve been putting off.

Covid-19 has slowed down IRS operations and processing times.  When the Internal Revenue Service (IRS) machine is humming along in a “normal” year, its computers are busy spitting out letters to taxpayers, and its personnel attempt to collect tax debt from delinquent taxpayers.  This includes audits, site visits, revenue officer contact and a host of other things.  The IRS is not “fast” in the best of times and now, due to Covid-19, their operations are severely impacted.  For example, from March through July 2020, the IRS computers were offline and NO mail sent to the IRS was opened.  All of the above can give you “more” time to address your situation.  Meaning, it can give you time to:

  • Get the documents needed to have the old tax returns prepared.
  • Allow you to prepare all the returns at once for submission.
  • Determine if (or how much) you owe the IRS and come up with a game plan to deal with it.
  • Mail or electronically file the returns with the IRS and then wait for them to catch up and respond.

If you only filed a 2018/2019 tax return for a stimulus check, but have other unfiled returns, you just put yourself back on the IRS’ radar.  Those who filed tax returns but have other unfiled tax returns, just “raised their hand” so-to-speak with the IRS.  Essentially, that person has now told the IRS 1) that they are still around and 2) where to send the letter asking about those other unfiled years.  It’s only going to be a matter of time before they reach out to you about those missing returns.  Best to use this time to perform the steps outlined in the bullet points above!

If you owe the IRS, the sooner you file, the sooner the 10 year clock for them to collect starts running.  Many taxpayers, and some practitioners, are unaware that the IRS by law only has 10 years’ time to collect a tax debt. This is referred to as the statute of limitations or in IRS speak, the Collection Statute Expiration Date or CSED for short. The 10-year period begins to run with the date of the “assessment” of the tax, not the tax year for which taxes are due. For example, if a return for 2017 is not filed until 2020 and the tax is assessed in 2020, the 10-year period begins to run in 2020 and expires in 2030.

If you’re not working or have a reduced income due to Covid-19, it could result in a “deal” with regards to your tax debt.  When it comes to settling ones tax debt, it all comes down to the IRS term referred to as reasonable collection potential or RCP.  The RCP is how the IRS measures the taxpayer’s ability to pay on the taxes they owe.  It includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.  It is the last point that can get you a deal during these “unprecedented times” we will be facing until about 2021.

You see, if you have no assets and your income is reduced, your RCP could be $0 or even negative once the IRS factors in those allowable expenses.  If your RCP is in fact $0, then that means that you won’t have to pay them anything (at the moment).  Why?  Because the IRS will place your account into Currently Not Collectible (CNC) status.  But what is also good about not having income coming in at this time is that you may be able to settle all your tax debt via an Offer In Compromise (OIC).  The OIC program allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

Now is the perfect time to “reset” your life and taxes.  Covid-19 will force some people to hit “rock bottom” so to speak.  But this is the best time to reset your life, get rid of the past and move forward.  Why?

  • When you hit rock bottom, you let go of everything. You start again with nothing and get rid of all the stuff in your life that doesn’t make sense.
  • Pain is the momentum and the motivation you’ve probably needed to make you actually deal with your tax situation once and for all.
  • Rock bottom is where your gratitude increases ten times, if not more. That’s because life is a battle and it’s not easy.  It’s not meant to be a walk in the park, but it can be so much better when you appreciate all that is around you.

Need help filing those old tax returns?  Why not make today the day you FINALLY deal with those old tax returns?  Why not take the first step to getting that IRS monkey off your back?  Take the first step RIGHT NOW and call our office or shoot us an email via the signature in our footer.  We can help you get any missing documents, file your returns and even deal with the IRS debt should you owe back taxes.  Trust us, you’ll feel much better once you put this behind you!

IRS CSEDs Are Sometimes Inaccurate

 

The Collection Statute Expiration Date (CSED) ends the Government’s right to pursue collection of a tax liability.  This date is generally 10 years from the date the tax was assessed.  However, some situations require the CSED to be recalculated.  In a 2013 audit by the Treasury Inspector General for Tax Administration (TIGTA), it was determined that the CSED was not always recalculated accurately.  An inaccurately calculated CSED could result in unlawful collection activity by the IRS and violate a taxpayer’s rights.  Conversely, the IRS could potentially lose revenue if an inaccurate CSED appears to have expired when the debt is still collectible.

Why TIGTA Did The Audit?

Over the years, the IRS has taken steps in an attempt to improve CSED accuracy. However, the National Taxpayer Advocate has reported miscalculated CSEDs as one of the most serious problems encountered by taxpayers. TIGTA’s audit was initiated to determine whether CSED recalculations were properly and accurately completed to effectively protect taxpayers’ rights and the Government’s interest.

What The Report Found.

TIGTA did a statistical sample of 75 tax modules from a population of 1,085 with manually recalculated CSEDs.  What they found was that 29 of the 75 tax modules, or roughly 40%, contained errors.  Their specific findings were:

  • Twenty-one had inaccurate CSEDs and eight were missing the required documentation to support the CSEDs.

  • Based on the results of their case review, it was estimated that CSEDs for 260 tax modules were extended longer than they should have been, 43 tax modules were not extended as long as they should have been, and 116 tax modules were unverifiable.

  • Most errors were made by employees.  Managerial approval is required when CSEDs are extended or updated for any reason.  However, the IRS internal controls requiring managerial approval were not always effective in ensuring the accuracy of manually recalculated CSEDs.

  • An IRS computer system recalculates most CSEDs systemically.  Random samples from eight separate activities that trigger systemic CSED recalculations showed that all CSEDs were accurate for six of the eight activities.  However, the CSED recalculations were not always accurate for modules involving bankruptcies or estates.

  • TIGTA also identified nine taxpayers who received an annual balance due reminder notice after the CSED expired.

What does this all mean?

If you have IRS debt that you believe has expired, but you are still receiving notices about it, then it could mean one of two things:

  1. Your CSED was inaccurately calculated
  2. There were actions taken on your account that stopped or “tolled” the CSED.

This post discusses what tolls the CSED and for how long.  If you are looking for how to calculate or recalculate your CSED, we recommend this post from our sister site.  It talks about how we offer a service, for a nominal price, where your CSED can be calculated so you know approximately when your CSED will expire.

Understanding IRS CSED Tolling Events

Many who owe taxes know that the IRS can not collect on a tax debt forever. Each tax assessment has what is known as a Collection Statute Expiration Date (CSED). Internal Revenue Code (IRC) section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. Once the CSED has been reached, it ends the government’s right to pursue collection of a liability.

Items that stop the 10 year clock. What is important to understand is that while the normal time to collect is 10 years, various circumstance may “extend” the CSED. What these circumstances essentially do is push the CSED date forward in time. The IRC speaks to “suspension” of the period of limitations, during which the CSED “clock” stops running. Such suspension periods lead to the extension of the CSED.

So what actions stop the clock and for how long? The most encountered suspension (or tolling) events often include:

  1. Bankruptcy: CSED is tolled from the date of filing the petition until the date of discharge, plus 6 months. IRC § 6503(h)(2).
  2. Pending Installment Agreement: CSED is tolled from the date of the request for an installment agreement, plus appeals, plus 30 days. IRC § 6331(k)(2) and 6631(k)(3).
  3. Termination of Installment Agreement: CSED is tolled 30 days from the date of termination, plus appeals. IRC § 6331(k)(3).
  4. Pending Offer in Compromise: CSED is tolled from the date of acceptance for processing of the OIC plus appeals after rejection, plus 30 days. IRC § 6331(k)(3).
  5. CDP Hearings: CSED is tolled from the date of a timely request until final disposition. Additionally, if it is less than 90 days from the CSED, the CSED is reset to 90 days from the date of final disposition. Reg. § 301.6330-1(g)(3).
  6. Military-related Service in a Combat Zone: CSED is tolled the length of service, plus 180 days. IRC § 7508(a)(1)(i).

What does this look like in reality?

To help one understand how this may look when they analyze an IRS Account Transcript, we’ll review a few examples.

Let’s say a 2018 tax return is filed on the due date of 4/15/19. The tax assessed on 4/15/19 ordinarily has a CSED of 4/15/29. The taxpayer request an installment agreement that is reviewed from 8/1/19 until 9/1/19. This will toll the CSED for 30 days for the review and another 30 days post review (or 60 days total). As such, the new CSED will be 6/15/29. Easy enough right?

In a more involved example, let’s say a taxpayer files their 2017 tax return on 4/15/18, reflecting a tax liability of $11,906. The normal CSED would be 4/15/28. The taxpayer then files a bankruptcy petition on 5/15/18, and receives a Chapter 7 discharge on 8/15/18. The CSED is suspended for the period of the bankruptcy (92 days) plus six months. Accordingly, the new CSED is 1/12/29. Still fairly straightforward.

Where things often get confusing (for taxpayers as well as for IRS employees calculating the CSED) is when there is an intersection of suspension events. What is important for the taxpayer (as well as the IRS employee calculating the CSED) to know is that more than one case action can suspend the running of the collection statute at the same time. Overlapping suspensions run concurrently; they are not cumulative.

To illustrate this, let’s look at one last example. Taxpayer Rogers owes 1040 taxes for the period ending 12/31/08. The tax assessment date is 06/01/09 which established the original CSED as 06/01/19. Rogers, who is in the Army Reserves, gets called up for combat duty and enters the combat zone on 05/10/14. He subsequently leaves the combat zone on 03/01/15. He submits an offer in compromise on 04/20/15, it is rejected on 10/17/15 and the rejection is not appealed.

Both case actions, entering the combat zone and submitting the offer in compromise, suspend and extend the CSED. The combat zone duty suspends the CSED from 05/10/14 through 03/01/15 plus 180 days (through 08/28/15). Consideration of the offer in compromise suspends the CSED from 04/20/15 through 10/17/15 plus an additional 30 days for the rejection appeal period (through 11/16/15).

However, because these case actions overlap, the CSED will be suspended only from the date Rogers enters the combat zone (TC 500 cc 56 on 05/10/14) through the date the offer in compromise is rejected and the rejection appeal period ends (TC 481 on 11/16/15). In this case, the overlapping of the two case actions (from 04/20/15 to 08/28/15) is considered in the CSED extension only once. If you are a tax geek looking for guidance, see IRM 5.1.19.3(2). As a result of the above, the CSED will be extended 555 days from the original CSED of 06/01/19. The new CSED will be 12/08/20.

Do YOU need help evaluating your CSED?
While you could go through the hassle of calculating your CSED, do you really want to? In this post from our sister site, we talk about some of the nitty-gritty details of the CSED. We also talk about how you can have US calculate the CSED for you for a flat $75 fee for an unlimited number of years. So if you want to know your CSED but don’t feel like calculating it, why not head on over to the other site and shoot us an email or give us a call?

How Long Should I Keep My Tax Records?

While the IRS will not tell a taxpayer how long they need to keep their tax records, it’s prudent to keep them anyway.  But just what should you keep and for how long? As a general rule of thumb, if you “attempted’ to file your return correctly, then you will want to keep everything for 3 years.  However, take a look at the two tables shown below for further details and items only applicable to certain situations.

Supporting Tax Documentation To Keep

Item Supporting Record
Income Form(s) W-2
Form(s) 1099 (INT, DIV, Etc.)
Bank statements
Form(s) K-1
Expenses Canceled checks or other proof of payment
Invoices
Receipts
Home Closing statements/HUD-1
Purchase and sales invoices
Proof of payment
Insurance records
Investments Brokerage statements
Mutual fund statements
Form(s) 1099
Form(s) 2439

 

Length Of Time One Should Keep Their Tax Documentation

Situation Retention Period
Owed tax and the subsequent three situations do not apply to you 3 years
Did not report income that is more than 25% of the gross income shown on the return you filed 6 years
Filed a fraudulent return Indefinite
Do not file a return Indefinite
File a claim for credit/refund after you filed your return 3 years or 2 years after tax was paid (whichever is later)
File a claim for a loss from worthless securities 7 years

 

How were the lengths of time determined?  Most of them coincide the the various IRS Statute of Limitations.  This is the length of time the IRS has to assess additional tax against a taxpayer, request further information or subject a return to audit.  Needless to say, one wants to make sure they have their “proof” for at least the length of the statute.  However, it may be advisable to keep your support indefinite.

For example, if you make contributions to your IRA, you will want to probably keep all of your tax returns.  Why?  Well, when it comes time for you to make your withdrawals come retirement, those that represent a return of the money you contributed are tax free.  How will you know how much you contributed?  Exactly; you’ll need the originally filed tax returns!  So keep those tax records as long as you think you may need to; you never know when you may have to reference them to prove your case.

Understanding IRS Statute Of Limitations

When dealing with an old tax return, sometimes people wonder just how long the IRS has to come after them for the tax.  Sometimes people want to know how long they have to claim their refund.  Other times people want to know what happens if there was a mistake.  The short answer? It all depends.

Filed Tax Returns:

Deadline for Assessment
Generally, the statute of limitations for the IRS to assess taxes on a taxpayer expires three (3) years from the due date of the return or the date on which it was filed, whichever is later.

However, the IRS has six (6) years to assess additional taxes if:

  • You omitted income that adds up to more than 25% of the income you reported on your return OR
  • You fail to included foreign financial assets that breached the reporting thresholds

Deadline For Collections
The IRS statute of limitations period for the collection of taxes, known as the Collection Statute Expiration Date (CSED), is generally ten (10) years. Thus, once an assessment occurs, the IRS has 10 years to collect.  If they can’t collect within the time frame then the taxes simply just vanish as a result of being discharged.

Unfiled, False or Fraudulent Returns:

Deadline to Claim Your Refund
The deadline for you to claim a refund on a tax return in which one was owed to you is 3 years from its due date (excluding extensions).  For example, if you were due a refund on your 2011 Income Tax Return (which was due April 15th 2012), you have until April 15th 2015 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury.

Note, there are no interest and penalties for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

No Statute Situations
The IRS has an “unlimited” amount of time to assess taxes against a taxpayer if they can establish that they:

  1. Simply failed to file a return;
  2. Filed a false or fraudulent return; or
  3. Willfully attempted to evade tax