Generally the IRS has ten years from the date tax is assessed to collect the unpaid liability. Once a statutory expiration date is reached, the IRS must then abate the tax and release any liens filed against the taxpayer's property. This action is rarely automatic. Frequently the IRS will continue collection activity after a statute has expired, either out of administrative backlog or a perception of taxpayer ignorance. An important taxpayer “tip” in handling any outstanding tax liability that spans multiple tax years, is to designate any voluntary payments to the most recent assessments. The reason being that these assessments have the longest statutory time frame subject to collection activity. Earlier assessments have shorter statutory time periods. If a taxpayer does not make a designation of a voluntary payment, the IRS will always apply the payment to the tax period with the shortest time remaining under collection statutes. This is in the best interest of the government not the taxpayer. Frequently the IRS will apply voluntary payments this way out of default regardless of any taxpayer designation. It’s important to document any designation clearly on the payment.
However, there are some actions that can “toll” or stop this ten year period from running, thereby extending the time the IRS has to collect any unpaid liability. The most common actions that extend the statutory collection period are: a pending bankruptcy, a judgement or litigation in tax court, a collection due process appeal, a pending offer in compromise, any time the taxpayer resides outside the U.S. and when the taxpayer voluntarily signs a waiver extending the collection statute. Other less common actions pertain to military deferments, tax assistance orders and estate tax liens. Because each taxpayer’s situation is unique and may possess its own complexities, it’s important for the taxpayer to not assume that a tax liability has expired just because ten years has passed. Professional assistance is important.
View the video below for even more information about the Collection Statute Expiration Date.