IRS Restructuring and Reform Act of 1998
The issue of Statutes of Limitations can be complicated. The RRA of 1998 made some changes to the Code. Below are some general rules to help you understand this complex area. Of course, the only way to know for sure the specific statute pertaining to a tax return is to have a professional analyze the IRS (or FTB) official records of your account. Keep in mind that if you do not file a return, the statute for both examination and collection never starts running! That is why even if the tax agency prepares a return for you (referred to as a “substitute for return” in IRS lingo), you should still file a return to start the statute of limitation running.
There are two basic types of statutes:
Assessment (for making changes to your return) – either by the IRS/FTB or another tax agency, or by you via filing an amended return or claim, and
Collection (the time period from the date of assessment that the IRS/FTB/EDD or another tax agency has to enforce collection of the tax.
IRS STATUTE OF LIMITATION
The general, the IRS assessment statute is three (3) years from when a return is filed (if filed before the due date, the actual due date for the return begins the due date for the return), or two years from when the tax is paid – whichever is later. If you have underreported 25% or more of your gross income, then the statute for assessment is open for six (6) years. If you willfully understate your tax liability (resulting in a civil fraud penalty at 75% of the tax liability), or if you neglect or refuse to file a tax return and the IRS must file a return for you (called a substitute return), there is no statute of limitation (that is scary….).
The taxpayer and the IRS can voluntarily enter into an agreement to extend the statute for assessment – either to a specific date (usually accomplished by the taxpayer and the IRS executing Form 872 for individual and corporate taxes), or for an unlimited period of time (by executing Form 872A for individual and corporate taxes) – until either the taxpayer or IRS elects to terminate the statute to a date 90 days following delivery of a Form 872-T to the IRS office handling the case. Other statute extension forms are used for specialty areas, such as employment and excise taxes.
In either case (specific or unlimited extension), the statute extension, under certain circumstances, can be further restricted to specific issues (this is referred to as a restricted consent). Whether or not to agree to an extension of the statute is a serious decision, and should not be made without the advice of a tax professional.
The collection statute can only be extended by agreement between the taxpayer and the IRS for two specific situations (discussed below). However, certain types of actions will automatically extend the statute for assessment and collection (e.g., an Offer in Compromise which suspends the statute while it is being considered by the IRS, and bankruptcy – which suspends the running of the statute for the period from filing the petition to discharge, plus six months).
While an uncommon practice, the IRS can file a motion in District Court to obtain a judgment against the taxpayer, which extends the collection statute for another 10 years. An excerpt from a 2004 District Court case appears at the end of this page as an illustration of the judgment process
Following is an excerpt from the Act that discusses the extension process:
RRA 3461 – Procedures for Extension of the IRS Statute of Limitations by Agreement
A. Provision(s) covered: R.R.A. § 3461. Procedures Relating to Extensions of Statute of Limitations By Agreement. I.R.C. §§ 6501(c) and 6502(a).
- Background: Section 6501 of the Internal Revenue Code generally provides that the Service has three years from the date a return is filed to assess additional taxes. Section 6502 generally provides that the Service has ten years from the date of assessment to collect the tax. Prior to the expiration of the limitations period provided by these provisions, the law provided that the taxpayer and the Service could agree in writing to extend the statute of limitations. Congress believed that many taxpayers were not being informed of their rights to refuse to extend the statute of limitations on assessment or to limit the scope of any such extension. In addition, Congress believed that all taxes should be collected within the 10 year statute and that the statute should not be extended.
- Change(s): The authority to extend the collection statute of limitations by agreement ended on December 31, 1999. Any extension of the collection statute already in effect on December 31, 1999, expired on December 31, 2002. An exception to this section was provided for extensions related to installment agreements. An extension of the collection statute entered into in conjunction with the acceptance of an installment agreement should be for the period necessary to satisfy the tax liability via the agreement. The legislation provides that the period of limitations for extensions related to installment agreements expired 90 days after the end of the extension period.
The legislation also requires that taxpayers be advised/notified of their right to refuse to extend the statute of limitations on assessment or in the alternative to limit an extension on the assessment statute to particular issues or for specific periods of time, each time that the Service requests that the taxpayer extend the limitations period.
Because the Service will have to complete collection actions within the 10 year statute in most cases, collection contacts and actions will have to be initiated sooner. Although this is true in general, it is especially true for cases where the collection statute will expire within the next 2 years and for cases where the original collection statute has been extended beyond December 31, 2002.
Although the statute of limitations for collection can be extended for installment agreements, the statutory waiver must be entered into at the time the installment agreement is accepted and must be for a determined period, i.e., for the period necessary to satisfy the tax liability via the agreement. The period of limitations will end on the 90th day after the end of the waiver period.
Examination personnel must provide notice to a taxpayer of his/her right to refuse to extend the statute of limitations on assessment, or to limit the scope and time of the extension each time such an extension is requested. Whether the taxpayer is advised orally or in written form, the giving of the notice must be documented in the taxpayer’s file, each time a request for extension is sought.
Entering into an extension of the statute is serious business. In my opinion, no taxpayer should make this decision without consulting was a tax resolution specialist. On occasion, the IRS agent may look to extend the statute to give him or her more time to identify additional adjustments (that means more tax to be paid!). Not extending the statute in that circumstance will usually result in the IRS issuing a Notice of Deficiency. Once a timely petition is filed, the case can most often be resolved in the Appeals Division.
Franchise Tax Board Statute for Examination and Collection
I’ve had inquiries regarding the statutes for a State of California income tax liability. Generally speaking, the FTB has a four (4) years to make a tax liability change through an audit, or for the taxpayer to file an amended return to change their prior tax liability.
Here is a link to an FTB document that discusses the California statute for making assessments.
However, the FTB has had an unlimited statute for collection. That changed effective July 1, 2006 when under new legislation, the statutory period for collection is 20 years. That is still twice as long as the IRS collection statute of 10 years.
Within 10 years of the assessment, the FTB can sue in Court and obtain a judgment against the taxpayer. This judgment is valid for 10 years, and it can be renewed once.
Here is a further explanation of the judgment process:
Judgment for tax. The FTB may file in the office of the county clerk in Sacramento County, or any other county, a certificate specifying the amount, due, the name and last-known address of the taxpayer liable, and the fact that the FTB has computed and levied the amount due, and request that judgment be entered for the amount due. [Cal. Rev. & Tax. Cd. § 19201 .] The county clerk then enters a judgment against the taxpayer and files the judgment in a Bank & Corporation Tax Judgments looseleaf book. [Cal. Rev. & Tax. Cd. § 19202 .] An abstract or copy of the judgment may be recorded with the county recorder. From the time of the recording, the judgment constitutes a lien on all real property of the taxpayer in the county or on property acquired by the taxpayer before the lien expires. [Cal. Rev. & Tax. Cd. § 19203 .]
The lien is effective and has the priority of a judgment lien for 10 years from the date of the recording, unless sooner released or discharged. The lien may be renewed. [Cal. Rev. & Tax. Cd. § 19204 .] The Franchise Tax Board may release all or any portion of the lien if it determines that the taxes are sufficiently secured by a lien on other property of the taxpayer or that such release will not jeopardize the collection of the tax or if the lien is legally unenforceable. [Cal. Rev. & Tax. Cd. § 19206 ; Cal. Rev. & Tax. Cd. § 19207 .]
The judgment may be executed in the same manner as executions may issue on other judgments and sales shall be held under execution as prescribed in the Code of Civil Procedure. [Cal. Rev. & Tax. Cd. § 19205 .]
In looking at the discussion that proceeded the passage of the new State law AB 911, you get an insight into why this new legislation was enacted:
Statute of limitations: Current law lacks a statute of limitations for the collection of delinquent taxpayer accounts. Generally, once a tax liability is due and payable, a statutory lien arises for the amount due upon a taxpayer’s real and personal property. The statutory lien exists for 10 years, but does not become unenforceable by lapse of time. The 10-year limitation on collection is extended or suspended under a number of specified circumstances.
This bill establishes a 20-year statute of limitations on collections, beginning at the last statutory lien date for each tax year. The liability would be extinguished at the end of the statute of limitations, abating the underlying tax.
California EDD Statute for Collection
As I mentioned above, the Franchise Tax Board has a 20-year collection statute of limitations for old debts. The EDD does not have any statute of limitations for collection other than a provision in the California constitution declaring debts owing to the State of California become unenforceable after 30 years (Article 12 § 30 of the California State Constitution).
That is scary! The EDD can chase a taxpayer for 30 years to collect an old debt!!
Here is an excerpt from a 2004 District Court case where the IRS sued in Court to have its trust fund recovery penalty assessment (this is where the IRS obtains an assessment against a responsible officer, employee or other person for uncollected and/or unpaid employment or excise taxes) extended by way of a judgment:
U.S. v. MILITELLO, Cite as 93 AFTR 2d 2004-2800, 06/09/2004 , Code Sec(s) 7403
UNITED STATES OF AMERICA, PLAINTIFF v. Salvatore MILITELLO, DEFENDANT.
|Court Name:||U.S. District Court, Eastern Dist. of Michigan,|
|Docket No.:||Civil No. 03-72704,|
|Tax Year(s):||Years 1990, 1991, 1992.|
|Disposition:||Decision for Govt.|
Actions to reduce assessments to judgment—trust fund recovery penalty. Pursuant to stipulation, judgment was entered for govt. and against taxpayer for unpaid balance of Code Sec. 6672 trust fund recovery penalty in stated amount plus interest.
FOR UNITED STATES OF AMERICA, PLAINTIFF, ELIZABETH LAN Trial At [pg. 2004-2801] torney, Tax Division U.S. Department of Justice Post Office Box 55 Ben Franklin Station Washington, D.C. 20044
FOR SALVATORE MILITELLO, DEFENDANT, ERWIN RUBENSTEIN Rubenstein & Isaacs 2000 Town Center, Suite 2700 Southfield, Michigan 48075-1318
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION,
STIPULATlON FOR ENTRY OF JUDGMENT
Judge: Hon. Robert H. Cleland
It is hereby stipulated and agreed that judgment may be entered in favor of the United States and against Salvatore Militello for the unpaid balance of the trust fund recovery penalty assessed against Salvatore Militello, pursuant to 26 U.S.C. § 6672, for the quarterly tax periods ending June 30, 1990, September 30, 1990, December 31, 1990, June 30, 1991, September 30, 1991, December 31, 1991, March 31, 1992, June 30, 1992, and September 30, 1992, in the amount of $64,634.09, plus statutory additions and interest from April 30, 2004, as provided by the Internal Revenue Code, with interest to accrue on the judgment as provided by 28 U.S.C. § 1961(c)(1), incorporating the rates of interest as provided by 26 U.S.C. § 6621.
It is hereby further stipulated and agreed that each party is to pay their own costs and fees, including any possible attorneys’ fees or other expenses of this litigation.
IT IS SO ORDERED.
Date: JUN 9 2004
HON. ROBERT H. CLELAND
United States District Judge
Substitute for Return
When a taxpayer fails to voluntarily file a tax return, the IRS has the authority under Section 6020(b) of the Internal Revenue Code to prepare a return for the taxpayer called a Substitute for Return (or, SFR for short). What is important to know is that the assessment of an SFR does NOT start the 3-year statute for assessment/audit. That is why it is important that whenever the IRS has prepared an SFR, the taxpayer should prepare and file his or her own return – just to start the 3-year clock running on assessments. Whether an SFR or taxpayer-prepared return is filed, the COLLECTION STATUTE is still 10 years from assessment.
Here is a 2011 Tax Court case that addressed this issue:
Code Section 6501—Limitations period on assessments—failure to file returns—IRS prepared returns.
TAXPAYERS LIVING ABROAD
Taxpayer Living Outside the U.S.
- The period of limitations on collection after assessment is suspended while the taxpayer is outside the United States if the absence is for a continuous period of at least six months per IRC 6503(c). To make certain that the Government has an opportunity to collect the tax after the taxpayer’s return, the period does not expire (where the taxpayer has been out of the country for six months or more) until six months after the taxpayer’s return to the country. As the application of this provision can result in the CSED being suspended for a very long time, policies for the administration of this code section are now established.
Policies For Adjusting the CSED When Internal Revenue Code (IRC) 6503(c) Applies
- These instructions are designed to promote procedural consistency in working International cases and to make statute suspension procedures, applying to Domestic and International taxpayers, more comparable. They apply to taxpayers who are presently abroad as well as to taxpayers who are currently in the US, but who were abroad for at least six consecutive months after the tax assessment date. The period that the CSED is recalculated and updated will be more limited with respect to taxpayers who have cooperated with IRS to resolve their liabilities or with whom we have maximized the IRS’s ability to collect. A taxpayer will be considered “cooperative” if the IRS determined that the taxpayer has fully responded to the IRS and has provided full information to the IRS with respect to collection of the assessment. In such instances, the case may be resolved by a taxpayer entering into a formal installment agreement or an offer in compromise or with the case being closed as currently-not-collectible for hardship reasons with closing codes 24 through 32. This policy does not apply to international taxpayers who have not resolved their liabilities and who are not cooperative. In those situations, where a taxpayer has been uncooperative or has not resolved the liability, the CSED will be recalculated and updated for the maximum amount of time allowed by IRC 6503(c) if the IRS determines that there is significant collection potential.
- With respect to taxpayers who are currently outside the United States, and who have systemically loaded or manually monitored installment agreements or periodic payment offers in compromise, for which the payment schedule is greater than 24 months, the maximum length of CSED recalculation is 16 years from the date of assessment.
- Continuous levies for taxpayers with international addresses will be recalculated and updated for however many years the IRC 6503(c) provision allows if the taxpayers involved have not cooperated with IRS to resolve their liabilities. In rare instances where a taxpayer has decided and agreed with the IRS to let the continuous levy be in effect as if it were a formal installment agreement, the statute will only be recalculated to a maximum duration of 16 years.
- Taxpayers currently in the United States who had previously been outside the United States for at least six consecutive months since the date of assessment will generally have a maximum of five years added to their CSED for prior IRC 6503(c) suspensions. For example, a taxpayer who was outside the United States for three years after the assessment was made would have a CSED recalculation and update of three years. A taxpayer who had been outside the United States for seven years after the assessment was made would have a CSED recalculation and update of five years. In rare instances where a taxpayer with significant collection potential had been out the United States for decades, recalculate the CSED as necessary for the time anticipated to collect the liability up to the maximum time allowed under the code.
- International taxpayers who are being reported as currently-not-collectible with closing codes 03 (unable to locate), 06 (International) and 12 (unable to contact) may be subject to ongoing recalculations and updates. Again, a determination of significant collection potential should be made when determining how long the collection statute should be recalculated. The collection statute should not be recalculated and updated for international taxpayers who have been reported as currently-not-collectible for hardship reasons (closing codes 24 through 32), except in rare instances where a mandatory follow-up date was set to determine if an asset had matured for collection potential.
Reasons For Recalculating the CSED For IRC 6503(c)
- Reasons can be based on the following criterion (applied to the extent that the policies above allow):
- A Form 433A that the taxpayer or power of attorney has signed stating the dates of residence outside the United States and Commonwealth Territories.
- Any other written information from the taxpayer or power of attorney stating the taxpayer was outside the United States and Commonwealth Territories.
- Oral statements by the taxpayer or power of attorney stating the dates the taxpayer was outside the United States and Commonwealth Territories so long as this information is clearly documented in the case history.
- Tax returns consistently filed since the year of tax assessment with a foreign address (with recalculation and update of the CSED up to the date the taxpayer signed the return).
- When you are not able to use one of the methods above to determine and verify the period the CSED is to be suspended, check data sources such as Accurint, Smart.Alx, IRP, third party testimony, etc., to determine whether a taxpayer has been outside the United States for a long period of time. Such sources may be used in later taxpayer or POA discussions to confirm the dates foreign travel/residence; however, do not rely solely on these sources to justify updating the CSED.
- If you are ultimately unable to communicate with the taxpayer or POA, you may be able to confirm that the taxpayer has been outside the United States with a government-based travel or residency source of information such as TECS Historical Travel Records (see IRM 184.108.40.206.2) or Department of State records of registration with a US Consulate in a foreign country. When a case has significant collection potential and the preponderance of information assembled at that point indicates being outside the US for the time period in question, you can update the statute for that period.
Procedures For Adjusting the CSED
- These instructions supersede all prior instructions for processing IRC 6503 CSED extensions. Use Form 8620 to request CSED updates based on the criteria established above. Since IRC 6503(c) automatically suspends the statute, there is no reason for the taxpayer to sign Form 8620. Form 8620 will be revised in the near future to reflect the procedures outlined in this IRM.
- Forms 8620 should be sent via secured e-mail to Case Processing (CCP) the campus address to which input requests are sent.
Statute recalculations and updates for IRC 6503(c) must have managerial approval on Form 8620 or on ICS.
- Form 8620 is not required for Bal Due modules active in ICS. IRC 6503(c) CSED updates can be made, with managerial approval, via ICS.
Accounts of Taxpayers Who Serve in a Combat Zone or Contingency Operation
- The deadline for certain acts performed by taxpayers and the Service is postponed when the taxpayer serves as follows:
- In an area designated as a combat zone;
- In a contingency operation designated by the Department of Defense;
- In a qualified hazardous duty area as defined by Congress; or
- In direct support of military operations in a combat zone certified by the Department of Defense.
The acts specified in IRC 7508 include paying income, estate, or gift tax, and collecting any tax. The regulations under IRC 7508 expand the list of covered acts to the payment of employment tax and most excise taxes. (Also, Rev. Proc. 2004-13, or its successor, expands the list provided in the statute and the regulations.) A deadline is postponed while the taxpayer serves in the area or operation and for any period of continuous hospitalization from such service (limited to five years of hospitalization in the United States), plus 180 days after the last day of service in the area or operation or period of hospitalization. See IRC 7508(e) for exceptions concerning tax in jeopardy, cases under title 11 of the USC (bankruptcy), and transferred assets. For more information see IRM 220.127.116.11.
- The combat zone or contingency operation freeze code suspends the CSED and can be set in two ways:
- Processing of a tax return where the taxpayer has written “Serving in Desert Storm/Shield, Bosnia, former Yugoslavia, Allied Force, Afghanistan, or Enduring Freedom.”
- Manual input of Transaction Code 500 with Closing Code 52 for the Desert Storm Combat Zone, Closing Code 54 for Bosnia/Former Yugoslavia or Allied Force, or Closing Code 56 for Afghanistan or Iraqi/Enduring Freedom. For more information see IRM 18.104.22.168.3.
- Once the a taxpayer has been in a Combat Zone the “-C” freeze remains on the account for historical purposes, even with accurate entry and exit dates.
- Under the Servicemembers Civil Relief Act (referred to as Section 510, Title 50 Appendix), the collection of any income tax due from any person in the military service, whether falling due before or during military service, may be deferred up to 180 days if ability to pay the tax is materially impaired because of that person’s military service. The CSED is suspended during the taxpayer’s military service and for an additional 270 days afterward.
- Transaction Code 500 with Closing Code 51 suspends the CSED for a Military Deferment. For more information see IRM 22.214.171.124.1.
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