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?

What To Do If You Have Unfiled Tax Returns

Did you know that per statistics in the 2017 IRS Data Book, there were about 14 million delinquent taxpayers at the end of 2016 and 2017? That means that the IRS has identified 14 million people who should have filed tax returns but did not. With that said, falling behind on filing your taxes is something that happens to many people.

We know that this can be scary, and can cause one to have many questions about how to make it right with the IRS.  Luckily, there are steps that you can take to satisfy what the IRS will require of you and get you back into the system so you can get rid of the worry! So, here are 10 things you should know about the situation:

File even if you don’t think you owe. If you were employed with wages and had taxes withheld from your paycheck, it is possible that you may not owe the IRS at all.  This will depend on the amount withheld from your wages and any other deductions you may have (mortgage interest, etc.). If you have refunds, you should actually receive those for the last three years’ returns UNLESS you have amounts owed for other years. In that scenario, the refunds will be applied to any balances due for the other years.

File original returns to replace IRS created returns.  Sometimes, when you don’t file a return, the IRS files one for you.  In IRS terminology, this is called a Substitute for Return (SFR).  Our experience has been that a SFR is the worst tax return ever! It reports the income that shows up on W2s and 1099s but doesn’t give you any deductions or exemptions.  You may already have a bill from the IRS that was created in connection with a SFR.  The good news is that you can correct these returns, and possibly lower the associated tax and penalties, by filing an “original” return.

Gather your records.  When you have old tax returns to file, it is important for them to be as accurate as possible. So the first things you want to do is pull together your records for the years where you did not file.  This may include 1099s or W2’s you received for work your performed, mortgage interest you paid, or interest, dividends and stock sales.  Don’t worry if you are missing records because if you are:

Secure your IRS transcripts. Your records are supplemented by securing the IRS transcripts that will show what has been reported to the IRS. Basically, you want to make sure you report everything the IRS has for your SSN, otherwise, they will send you some notices claiming that you under reported income. Getting the transcripts will cross-check your records, filling in anything that is missing. The appropriate transcript to request is called the Wage and Income Transcript. You can get it via this page on the IRS website and you can request it online or you can use Form 4506-T to request it via mail.

Review the past six years of activity.    If you have six or more years of unfiled returns, make sure you do the above two steps for each year. Why? In most cases, the IRS requires the last six years’ tax returns to be filed as an indicator of being current and compliant.  This is per Policy Statement 5-133 and Internal Revenue Manual 4.12.1.3.  As such, make this your starting point of your analysis.

Review other sources of income. The IRS transcripts are a checking point, but you will also need to check for things that aren’t reported on them. For example, if there is income you earned that is not on the transcripts (e.g. cash payments), you need to make sure you calculate it and include it on your return.

Review your business income and expenses if you’re self employed.  Income can be recalculated using several methods, including 1099 reporting to the IRS or your bank deposits.  Working with this number, determining what you spent to generate that income. When done, take a look at what is left (i.e. the profit). You can then compare that number to what you spent for that year to live (e.g. rent, mortgage, utilities, etc.) to make sure it appears reasonable/logical. Too often, we see tax returns where there is no business profit, which then begs us to ask “so just how did you live that year?” Rest assured, if we can ask that question, the IRS WILL also be thinking of it too!

Perform a financial review if you think you may owe.  Unfiled returns are really a two-step process:

  1. Getting the returns prepared and filed and,
  2. Negotiating solutions for any balances due with the IRS collections division.  

To perform the second step, one has to prepare a financial analysis of their situation and present it to the IRS. This involves a review of your current income, living expenses, property and debts. It is often the case that the amount owed on unfiled returns cannot be repaid. So performing this analysis will help you determine if your “resolution” will ultimately be to enter into a payment plan, request an offer in compromise, or have your account be put in an uncollectible status.

Consider filing the returns separately if you’re married. If you’re married, but only one spouse was responsible for creating IRS debt, strong consideration should be given to filing a separate return. Filing separately can limit who the IRS can collect from – protecting the non-liable spouse.

File your returns in person if possible. If possible, the unfiled returns should be hand-filed at an IRS Taxpayer Assistance Center. Note that the centers are by appointment only so you will need to schedule it via the previous link. If you bring an extra copy to the center, you can get it stamped by the IRS as proof of filing.  If you are working with an IRS Revenue Officer, the returns should be filed directly with that person.  It can take the IRS several months to process the returns. But if you file them directly with their personnel, it can speed up the processing time, which will then “stop the clock” in terms of certain penalties.

If you owe money, the next step is to enter into one of the 10 resolution options solutions to solve your IRS tax debt as discussed on our sister site.