Sometimes it is best to wait for the IRS’s collection statute to expire. This is a wait-and-see approach where the taxpayer waits to see if the IRS attempts to collect the tax debt. To succeed, it is important for the taxpayer to not extend the IRS’s collection statute. This issue came to a head in United States v. Kidwell, No. 2:16-433 WBS EFB (E.D. Cal. 2017).
Facts & Procedural History
The Kidwell case involved unpaid employment taxes. The taxes were reported on a Form 941 for the period ending September 30, 2004, which was filed on April 4, 2005, and a Form 941 for the period ending December 31, 2004, which was filed on January 31, 2005.
The IRS assessed the taxes on March 28, 2005 and May 23, 2005.
On March 1, 2016, the government sued the taxpayer to reduce the IRS tax debt to a judgment. This would allow the government to continue to try to collect the unpaid taxes beyond the normal 10-year collection statute.
The IRS’s Ten Year Collection Period
The IRS’s collection statute is generally ten years from the day the tax is assessed. So in this case, it would seem that the ten year period had lapsed by the time the government brought suit to collect the taxes (the tax was assessed in 2005 and the government brought suit in 2016–just over ten years later).
But the analysis does not stop there. There are several actions that can extend the statute. The rules that extend the statue when the taxpayer submits an offer in compromise were came up in this case.
The Offer in Compromise
The offer in compromise is a formal administrative process for submitting a proposal to settle unpaid taxes. The statute of limitations rule for offers says that the IRS’s ten year collection statute is suspended while an offer-in-compromise is pending and for thirty days after any rejection or appeal of the rejection.
The Missing Offer in Compromise
In the Kidwell case, the IRS provided records showing that an offer in compromise was submitted, but it could not produce the offer or any other evidence about the offer having been submitted. The government conceded that the IRS destroyed the administrative records.
One would think that taxpayers who are trying to run out the statute of limitations would know whether they submitted an offer in compromise. That was not the case here. The taxpayer did not recall submitting an offer in compromise:
all of the deposition testimony that defendant points to states that defendant and his agents could not recall whether defendant submitted an offer-in-compromise. Defendant testified that he did not handle the taxes for the business, he “would only be guessing” whether an offer-in-compromise was filed, and it was “a possibility” that his accountant filed an offer for him. (Kidwell Dep. 64:17-65:21.) Defendant’s accountant, Ms. Kendall, stated that she “didn’t even remember [they] did an offer for [defendant].” (See Luoma Decl., Ex. B 52:5-8 (Docket No. 13-3).) Defendant’s business secretary, when asked whether she was aware that defendant made an offer-in-compromise, admitted that she was not the person who was corresponding with the IRS and was “not aware of an Offer in Compromise that [Ms. Kendall] would have made.” (Id., Ex. C 48:6-49:10.)
The Taxpayer argued that these facts created a triable issue and that it should get its day in court to prove these items. The court did not agree.
The court concluded that this evidence did not create a triable issue of material fact as to the tolling or expiration of the statute of limitations. As such, it ruled in favor of the government.
It should also be noted that the Taxpayer argued that the tax liability was his wife’s, which means any offer would have been submitted for her and not for him. We have seen the IRS do this. It is a common practice. The IRS also does this with bankruptcy holds. The court was not presented with expert testimony explaining this and, as such, it did not find this argument persuasive.