the Statute of Limitations in Federal Tax Cases
Robert H. Breakfield and Charles E. Alvis
2006 - A tax preparer’s knowledge of the IRS collection
statute of limitations (the legal bar to the collection of
delinquent taxes) can be of valuable assistance to the taxpayer
faced with a federal tax liability.
are two basic statutes of limitation. First is the statute
of limitations set forth in IRC section 6501(a), which provides
that the IRS has three years to assess an additional tax
due. For example, for a taxpayer who filed a 2004 tax return
on April 15, 2005, the IRS has until April 15, 2008, to
assess an additional tax. This rule has two major exceptions.
The three-year statute is extended to six years in a case
where the taxpayer has omitted more than 25% of gross income
[see IRC section 6501(e)(1)(A)]. Second, there is no statute
of limitation in cases where no return has been filed, or
where the taxpayer has filed a fraudulent return [see IRC
sections 6501(c)(1), 6501(c)(2), and 6501(c)(3)]. These
two exceptions permit the IRS to assess an additional tax
at any time.
understood is the second basic statute of limitations that
defines the period of limitation for the collection of the
tax. IRC section 6502(a)(1) establishes a statute of limitation
collection period of 10 years.
faced with a collection action must know the general rule
of limitation and the circumstances when the statute is
extended by agreement or by law.
the Statute Begins to Run
the date on which the running of the collection statute
commences depends upon the date the tax is assessed. (See
IRC section 6203 and Treasury Regulations section 301.6203-1.)
The assessment of the tax begins with the filing of the
tax return, or with the final determination in the examination
process. The assessment is not the same as the filing of
the return. In the case of a paper return mailed to a service
center or an electronically filed return, the assessment
occurs when the assessment officer signs Form 23C, Assessment
Certificate—Summary Record of Assessment. According
to Treasury Regulation 301.6203-1, the assessment shall
be made by an assessment officer signing the summary record
of assessment. The U.S. Tax Court has upheld the use of
computer-generated Revenue Accounting Control Report 006
(Summary Record of Assessment) in lieu of a hand-signed
Form 23C [see Thomas W. Roberts v. Comm’r,
118 TC 365 (2002)].
cases involve both an initial assessment and a subsequent
assessment [IRC section 6204(a)]. The last assessment of
the tax is the commencement date of the 10-year statute
period. If a taxpayer files a paper return with the service
center on April 15, 2005, the actual assessment of the tax
may not occur until June or July 2005, when the assessment
entry is made on the IRS’s records (Treasury Regulations
section 301.6203-1). If, however, the taxpayer’s return
is subject to examination and a subsequent assessment is
made, the new period for the 10-year statute will commence
with the recording of the second assessment [Treasury Regulations
section 301-6502-1(a)(1)]. If the original return was filed
with an unpaid balance due and a subsequent examination
of the return resulted in a second assessment, then there
will be two 10-year statutory periods. The initial balance
assessment will start the 10-year statute for the first
assessment; the balance due created by the subsequent examination
will start the10-year statute for the second assessment.
when the statute of limitation has commenced can be ascertained
from a transcript of the taxpayer’s account, which
can be obtained by filing IRS Form 4506-T. The transcript
of the taxpayer account will identify the date of all assessments
with respect to the tax years at issue. Securing the transcript
of account is an essential step to properly verify the time
remaining on the collection of statute.
factors stop the statute from running. Factors that interrupt
the statute include a taxpayer agreement to suspend the
statute, and the operation of law. The following are circumstances
under which the taxpayer has agreed to toll the statute.
900 and installment agreement. To avoid enforced
collection activity (e.g., a levy against wages or a bank
account), a taxpayer may seek administrative relief through
the IRS. The IRS has the authority to enter into an installment
agreement with a taxpayer, which is a contract whereby the
IRS suspends enforced collection action in exchange for
the taxpayer’s agreement to make installment payments.
The revenue officer has the authority to condition the grant
of an installment agreement with the requirement that the
taxpayer consent to extend the collection statute of limitation.
voluntary agreement to extend the statute is memorialized
by the execution of IRS Form 900; it is common practice
in many IRS offices to make this a condition of the installment
agreement. Form 900 provides for the extension of the collection
statute to some future specific date and fixes the date
of the extension by agreement. The execution of a Form 900
is reflected on the taxpayer’s transcript of account,
and constitutes a critical piece of evidence in determining
the time remaining under the statute. The American Jobs
Creation Act of 2004 amended IRC section 6159 to allow the
IRS to enter into installment agreements that will result
in only a partial payment of the tax liability before the
10-year statutory period expires; under this new procedure,
a revenue officer cannot condition an agreement with a demand
to sign Form 900. The IRS website, www.irs.gov, has additional
information on the partial-payment option.
in compromise. IRC section 7122 permits the
IRS to settle a taxpayer’s liability for less than
the balance due. The offer in compromise (OIC) process involves
the submission of completed IRS Forms 656, 433A, and 433B,
and a $150 user fee mailed to one of the designated OIC
units at service centers situated across the country. The
statute of limitation for collection is suspended while
an offer is considered pending by the IRS (see Form 656).
offers. The “acceptance for processing”
by an OIC unit does not mean that the offer itself is accepted.
It merely means that the initial processor has determined
that the offer is legally sufficient for further review.
Item 8(e) of Form 656 provides that the taxpayer has agreed
to the suspension of the remaining time period of the collection
statute for the period that the offer is under review. The
termination of the review occurs when the taxpayer is informed
in writing that the offer has been rejected. The OIC process
can take many months. In United States v. Holloway
[798 F.2d 175 (6th Cir. 1986); cert. denied, 481 U.S. 1018
(1987)], the taxpayer claimed that his offer was rejected
by implication when the IRS referred his case to the U.S.
Department of Justice for prosecution. After the offer was
formally rejected, the taxpayer found that the statute of
limitation for collection had been suspended during the
entire period the offer was under consideration [see also
United States v. Ressler, 576 F.2d 650 (5th Cir.
Holloway, the taxpayer’s deficiency for
the periods 1950 through 1957 and 1960 was finally determined
by the U.S. Tax Court on October 30, 1964. On June 18, 1965,
the taxpayer filed an OIC pursuant to IRC section 7122.
Form 656, signed by the taxpayer, suspended the running
of the statute. Subsequently, the IRS reviewed the offer
on the following timetable:
February 3, 1966: The IRS’s Collection division
referred the case to the Criminal Investigation Division
(CID) special agents for a potential tax-fraud investigation.
October 18, 1968: The IRS referred the case to the Tax
Division of the Department of Justice for reconsideration
of tax-fraud prosecution.
May 20, 1970: The taxpayers were indicted for violation
of 18 USC 1001, for knowingly filing a false statement
of financial condition. The U.S. District Court dismissed
the case for preindictment delay.
June 12, 1972: The IRS notified the taxpayer that an updated
Form 433A (Statement of Financial Conditions) was required
for consideration of an OIC.
February 14, 1973: The IRS formally rejected the OIC for
failure to supply updated financial statements.
September 20, 1976: The U.S. Attorney filed action in
the U.S. District Court to reduce to judgment the original
holding that the statutory period was suspended until the
OIC was terminated, withdrawn, or formally rejected, the
appeal court in Holloway cited Myrick vs. U.S.
[296 F2d 312 (5th Cir. 1961)].
Holloway, the collection statute commenced with
the assessment after the final determination of the U.S.
Tax Court (October 30, 1964). When the Holloways submitted
an OIC on June 18, 1965, only 231 days of the collection
statute had run. On February 14, 1973, the IRS rejected
the offer. On September 20, 1976, the U.S. Attorney commenced
action to reduce the assessment to judgment; therefore,
an additional three years, seven months, and six days of
the collection statute had run. At the time of the U.S.
District Court filing, the statute had run for a total of
four years, four months, and 25 days. (In 1976, the collection
statute was six years, not 10 years.) What Holloway
makes clear is that the mere passing of time does not
result in the expiration of the statute of limitations.
Although more than 11 years had elapsed, only four years,
four months, and 25 days had run against the statute of
lesson from this case is that a taxpayer should acknowledge
in writing having been informed of the adverse consequences
of suspending the statute of limitation triggered by an
offers. In cases where a taxpayer successfully
presents an OIC that is accepted by the IRS, taxpayers and
their advisors should be cognizant of the collateral terms
of the successful offer. Form 656 requires that a taxpayer
who has an offer accepted must remain in compliance with
all future tax filings for a period of five years, beginning
with the calendar year that follows the acceptance of the
offer [Item 8(d)]. Form 656 Item 8(N) specifies that failure
by the taxpayer to remain in compliance will trigger the
default of the offer. Once the IRS notifies the taxpayer
that his offer is in default, the IRS may resume collection
action for the full amount of the original assessment, plus
interest and penalties, less the amount paid toward the
original offer. The notification to the taxpayer of the
default triggers the resumption of the suspended statute
of limitation (see Holloway). Once again, taxpayers
and advisors must carefully review Form 656 for a clear
understanding of the taxpayer’s obligation under the
offer program. The authors recommend that the taxpayer initial
each paragraph regarding the conditions set forth on Form
spouse claims. IRC section 6015 provides remedial
benefits to spouses that file joint returns with noncomplying
taxpayers. In many collection situations, a tax advisor
will be representing an innocent spouse.
a taxpayer claims innocent spouse benefits, the collection
statute is suspended under IRC section 6015 by filing Form
8857. The statute remains suspended until the IRS notifies
the taxpayer that the claim has been denied, and for 60
each of the above circumstances, the assumption is that
the taxpayer has sought remediation from collection activities.
As a condition of securing the benefit, the taxpayer may
(in the case of a signed Form 900) or must (in the case
of an OIC submission or an innocent spouse claim) agree
to the extension of the collection statute.
of the Collection Statute by Operation of Law
A petition filed in the U.S. Bankruptcy Court
will act to stay IRS collection efforts. The general rule,
according to Treasury Regulations section 301.6503(b)-1,
is that the collection statute is suspended when the taxpayer’s
assets are in the control or custody of any court, such
as a typical bankruptcy filing. The collection statute is
suspended during the bankruptcy proceedings and for a period
of six months after the bankruptcy proceedings have terminated.
This suspension applies to assessments of tax and to trust
fund recovery penalty cases in which the bankruptcy court
cannot discharge the tax or penalty. For example, in a case
where the taxpayer has been assessed a 100% penalty for
trust fund violations under IRC section 6672, this assessment
cannot be discharged in bankruptcy [see 11 USC 507(a)(7)(c)
and United States v. Onofre J. Sotelo, 436 U.S.
268 (1978)]. Nor can an assessment of taxes that are less
than three years old be eliminated by bankruptcy; nor may
assessments that arise from fraud [11 USC. 507(a)(8)(A)(i)].
a taxpayer deciding to file a petition for bankruptcy must
consider the implications of the suspended collection statute
in cases where bankruptcy may be of no help to the taxpayer.
When evaluating the time remaining on the collection statute,
taxpayers and their advisors should review the transcript
of the taxpayer’s account for bankruptcy filings and
court conclusion dates.
expiration of the 10-year collection statute forever bars
the IRS from the collection of the tax. Often, tax liens
remain filed in the clerk of court’s office in the
county of the taxpayer’s residence. The recorded lien
can raise issues with land transactions or with refinancing.
Assuming that the taxpayer or his advisor has concluded
that the statute has expired, the lien is also extinguished
[Treasury Regulations section 301.6325-1]. On occasion,
title insurance companies, lawyers, or banks want proof
that the statute has expired. This information can be obtained
from the IRS’s Small Business/Self-Employed Operating
Division responsible for the taxpayer’s geographic
area. The office that handles this matter is the Centralized
Lien Processing unit; information can be accessed through
the IRS’s Practitioner Priority Service hotline at
It is possible for the federal government to extend the
collection statute by reducing the assessment to a judgment
under IRC section 7403 [United States v. Ettelson
(159 F2d 193)].
IRS may determine that it is likely that the taxpayer has
available assets to pay the tax at some point after the
statute of limitation for collections has expired. In rare
cases, the IRS and the district counsel’s office will
refer the matter to the U.S. Attorney’s office. The
federal government can proceed to reduce the assessment
to a judgment; a judgment in favor of the United States
has a 20-year statute of limitation. According to IRC section
6323(f)1 and 2, a judgment lien against a judgment debtor’s
real property comes into existence only when a certified
copy of the abstract of judgment is properly filed. The
federal Fair Debt Collection Practices Act (FDCPA) section
3201(a) requires the filing to be made in the same manner
as a notice of tax lien filed under IRC sections 6323(f)(1)
and (2). An additional 20-year renewal may be obtained with
court approval under 28 USC section 3201(c).
here to read Sidebar.
H. Breakfield, JD, LLM, is a professor of business
law and tax, and Charles E. Alvis, MBA, MPA, CFP,
CPA/PFS, is an associate professor of accounting,
both at the college of business administration of Winthrop
University, Rock Hill, S.C.