The “Wait & See” Approach to IRS Tax Debts

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IRS debts wait and see

While owing money to the IRS is not ideal, it is often manageable. One just needs a view of the longer time horizon.

As it turns out, in many cases, the IRS never even bothers to attempt to collect unpaid taxes and/or it ends up only collecting a small amount. While there are a lot of articles about settling back taxes with the IRS as a remedy, there is little in terms of the “wait and see” approach as a remedy.

The recent Hall v. Commissioner, No. 23342-22L (U.S.T.C. Jun. 28, 2024), case involves a taxpayer who may have inadvertently or intentionally adopted a “wait and see” approach to their tax liabilities. This case provides a common fact pattern that allows us to consider this approach.

Facts & Procedural History

This case involves an individual taxpayer. She owed income taxes to the IRS for 2014, 2015, and 2016. The court opinion suggests but does not provide this fact, but we’ll assume that the taxpayer timely filed her income tax returns for these years.

On August 23, 2021, the IRS issued a levy notice to the taxpayer to attempt to collect the taxes. Within 30 days, the taxpayer filed a response asking for a collection due process hearing with the IRS Office of Appeals. IRS Appeals sent out its standard letter asking for financial information and to schedule a call to discuss collection alternatives. The taxpayer did not attend the scheduled hearing or submit the requested documentation. IRS Appeals sustained the levy notice, and the taxpayer filed a petition with the U.S. Tax Court.

In the case, the taxpayer asserted that the IRS’s 10-year collection statute had expired. The court noted that it had not expired, but it was close to expiring.

The Collection Statute Expiration Date

The collection statute expiration date or CSED refers to the time the IRS has to collect an unpaid tax balance. Under Section 6502(a)(1), the IRS generally has ten years from the date of assessment to collect an unpaid tax debt.

This ten-year period starts to run from the date the tax return is filed. Thus, as in this case, if the taxpayer’s 2014 return was filed in 2015, the CSED would start to run in 2015 and would expire in 2025. There are nuances here.

One nuance arises when the CSED does not start running when the taxpayer does not file a tax return, as there is no assessment to start the CSED. Another common issue involves later assessments made by the IRS, such as an increase in taxes due to an IRS audit. The CSED generally starts from the date of the assessment for the newly assessed tax. We’ll address some of the other nuances below.

For now, suffice it to say that once the CSED expires, the IRS can no longer legally collect the debt. This is why the “wait and see” approach can be a remedy for taxpayers who have been unable to pay their tax liabilities or those who just don’t want to pay.

Extending the IRS’s CSED

While the CSED starts running from the date of assessment, various actions and circumstances can pause or extend this period. Many of these rules are found in Section 6503 of the tax code.

Section 6503 provides that the following situations suspend or extend the CSED:

  1. Offer in Compromise (OIC): When a taxpayer submits an OIC, the CSED is suspended while the offer is pending, for 30 days after rejection, and during the appeal period if the taxpayer appeals the rejection.
  2. Bankruptcy: The CSED is suspended during the period the IRS is prohibited from collecting due to a bankruptcy filing, plus an additional six months.
  3. Installment Agreement: The CSED is suspended while an installment agreement is pending, for 30 days after rejection, and during any appeal period.
  4. Living outside the United States: If a taxpayer is continuously outside the U.S. for at least six months, the CSED is suspended for the time they are abroad and up to six months after their return.
  5. Military Service in a Combat Zone: The CSED is suspended for the period of service in a combat zone, plus 270 days thereafter.
  6. Taxpayer Assistance Order: If a Taxpayer Advocate Service issues a Taxpayer Assistance Order, the CSED is suspended while the order is in effect.

The taxpayer can also enter into a written agreement with the IRS to extend the CSED. This is typically done using Form 900, Tax Collection Waiver. While the IRS might push for this extension, especially if they’re running out of time to collect, it’s usually not in the taxpayer’s best interest to agree to this, as it gives the IRS more time to come after their assets. But in some cases, like when negotiating an installment agreement, the IRS might make it a condition of the deal.

These are some of the most common ways that the CSED is extended.

The CDP Hearing Extends the CSED

The CDP hearing, as seen in the Hall case, is another way the CSED can be extended. The CDP hearing is a double-edged sword for taxpayers. While it provides an opportunity to challenge the IRS’s collection actions, it also stops the clock on the CSED.

Here’s how it works:

  1. When a taxpayer requests a CDP hearing, the CSED is immediately suspended. This suspension starts from the day the CDP request is filed.
  2. The suspension continues while the IRS Office of Appeals considers the case. This can take months, sometimes even a year or more, depending on the complexity of the case and the backlog at the IRS.
  3. If the Appeals Office rules against the taxpayer and the taxpayer decides to dispute the IRS’s determination in the tax court, the clock stays stopped. The entire time the case is pending in tax court, which can be years, the CSED isn’t running.
  4. Even after the tax court makes its decision, the suspension doesn’t end immediately. There’s an additional 90-day period after the tax court’s decision becomes final where the CSED remains suspended.
  5. Only after all of this–the initial hearing, possible tax court case, and the 90-day period–does the CSED clock start ticking again.

Taxpayers often request CDP hearings to buy time or explore collection alternatives. But they might not realize they’re also giving the IRS more time on the back end to collect. In the Hall case, the taxpayer’s CDP request added significant time to the CSED for the IRS to do just that.

The Hall case is also instructive in that it shows that even if a taxpayer doesn’t show up for their scheduled CDP hearing, as happened in Hall, the mere act of requesting the hearing extends the CSED. The IRS doesn’t have to successfully conduct the hearing for the extension to apply.

The “Wait and See” Approach

The “wait and see” approach is the default approach for dealing with IRS balances. It often involves doing nothing other than waiting.

The IRS does fail to collect, even substantial amounts, due to the CSED expiring. There are many reasons for this. There are instances when it is just the IRS not realizing the CSED is imminent. There are instances involving circumstances like government shutdowns during COVID. There are instances where the IRS has determined, often incorrectly, that the taxpayer does not have assets to collect. There are other instances where the IRS was simply not able to locate the taxpayer’s assets. Regardless of the reason, it happens and it is a windfall for those who avoid paying.

For those who don’t actively plan for this approach, but just end up here by doing nothing, they still have to keep an eye on their mail. Some IRS notices can’t be ignored. They also have to be smart about how they respond–or don’t respond–to the IRS. One wrong response can toll or extend the statute, as in the Hall case.

For those trying to avoid paying, those planning for the “wait and see” approach, they may take steps to prepare for the IRS and to wait it out. For example, they may sell or borrow against property before the IRS files a Notice of Federal Tax Lien, which would encumber the property. They may plan on living off of the proceeds until the IRS shows up to collect. They may also carefully study Section 6334, which outlines property exempt from levy, including certain amounts of wages, tools of trade, and personal effects, to understand which assets are subject to IRS levy. They may also note the shorter time periods that dictate whether taxes can be discharged in bankruptcy and not having any unfiled tax returns, and keep an eye on the bankruptcy eligibility and discharge rules and be ready to file should the IRS show up.

The Takeaway

While owing money to the IRS can be stressful, time can indeed be on the taxpayer’s side. The IRS’s ten-year collection statute provides an opportunity for those struggling with tax debts to potentially outlast the collection period. This “wait and see” approach is often the default strategy, requiring no active work or consideration from the taxpayer. The Hall case shows how even unintentional actions, like requesting a CDP hearing, can extend the IRS’s collection window. For those who find themselves using time as a remedy, they have to be mindful of these rules.

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