A statute of limitations is a length of time an authority figure can pursue a matter after the incident in question happened.
If you’ve watched TV shows like Law and Order you may be familiar with the term in the legal sense, where crimes have various statutes of limitations, meaning that if the police cannot make a conviction within that window of time after a crime happened they are forced to let it go.
In the IRS tax world the concept is similar.
Any time taxes are filed and a tax balance due is created, the IRS has ten years from that date to collect on that tax. This period of time is called the “Collection Statute Expiration Date” or CSED.
For example, if you filed taxes April 15, 2019 that created a balance you did not pay at that time, the CSED date would be ten years from when that balance is assessed — more or less April 15, 2029.
This is an important concept to understand when you owe a tax balance, since the IRS will become more aggressive in collecting that debt as the CSED date approaches.
CSEDs and IRS Collection Action
Though it’s not uncommon for the IRS to begin the collections process shortly after assessing an unpaid balance, they are also practical about gauging the amount of time they’ll have to collect on the debt.
If you’ve managed to carry an unpaid tax balance for several years, for instance, you may be surprised when they suddenly spring into collection action as your CSED dates approach. The IRS likes to give itself a few years to collect, so they won’t wait until the very end of that period.
However, the flip side of this is that the IRS may be more willing to negotiate an Offer in Compromise or a lenient installment agreement if you can demonstrate you lack the funds to fully pay off the balance by the CSED date, but are willing to pay what you can. They may then figure it’s better to get something than nothing.
CSEDs and Unfiled Tax Returns
If you’ve gone one or more years without filing tax returns the IRS may eventually file what is called a Substitute for Return (SFR).
This essentially means they gather income and tax withholding information made available to them, often from your employer having submitted the W2s on your behalf that year. They then complete a substituted return on your behalf and assess any tax due balance generated.
When this happens, the CSED date is ten years from the date that balance is assessed, meaning that even a tax year say 7 years back will not be limited to a 3 year CSED (of ten years from the tax year).
The IRS doesn’t always file substitute returns, but often will do so either because a pattern of your other tax years suggests it’s likely you’d owe a balance, or information about that tax year they have access to leads them to think so.
It’s important to note that the IRS will file the substitute return without much that benefits you, including household deductions or business expenses. That could mean owing significantly more tax than if you’d filed the return yourself and included that information.
You can always file your own return for that year after they file a substitute return to update the balance due, but it will take time for them to update the balance and they may still pursue you for their assessed balance in the mean time.