Like any debt, back taxes can be an overwhelming problem. You may worry that you’ll never get caught up. If you’re wondering if tax debt can be forgiven, read on to learn how the Internal revenue service handles debt. There may be options for tax debt forgiveness, but it’s important to understand the pros and cons.
When Is Tax Debt Eligible to Be Forgiven?
The statute of limitations on federal tax debt is 10 years. That means that after a 10-year period, the IRS can no longer legally collect and may forgive tax debt.
However, this does NOT mean you can simply wait 10 years.
First, the 10 years is countered from the date of tax assessment i.e. the date the IRS took note of your debt. You can find this date on your Notice of Deficiency.
The 10-year clock stops, though, while you’re negotiating your payment plan or if the IRS cannot collect from you. IN most cases, the IRS will place levies or liens to force your hand. So, most people with tax debt will need to seek remedies, such as:
- Requesting an installment agreement or Offer in Compromise (OIC)
- Petitioning as Currently Not Collectible (CNC)
- Filing for bankruptcy
During these processes, the timer is paused. And it may not resume right away. For example, the IRS does not resume collection efforts — or the 10-year-clock — until 6 months after bankruptcy proceedings have ended.
Also, some payment agreements with the IRS require you to extend the collections period. This means that the statute of limitations is also extended.
All in all, this means that your actual Collection Statute Expiration Date (CSED) could be much further away than you think.
When is My Collection Statute Expiration Date (CSED)?
Your CSED is technically 10 years from your tax assessment date. However, the IRS pauses the clock whenever they cannot collect from you. That includes any period of time when you’re negotiating with them or unable to pay. If you took advantage of a payment plan, the clock only runs while you’re actively paying.
If you requested an Offer in Compromise (OIC), the timer stops while the IRS considers your offer.
Bankruptcy proceedings can take up to a year, and the IRS waits 6 months after that to start collecting again.
The 10-year clock also stops when you’re:
- Outside of the U.S. for more than 6 months
- Deferring debts while on military active duty
- Going through any litigation where assets are in court custody (e.g. divorce proceedings)
If any of these situations apply to you, your CSED could be more like 12-15 years or more from your initial tax assessment date.
How the IRS Handles Tax Debt Collections
Assuming that you have still not paid off your old debt when the CSED arrives, the IRS can no longer collect. However, this would likely be a long process. The IRS will place a tax lien as soon as your tax bill becomes overdue. They may also garnish your wages or impose levies on your bank account or other assets.
As you don’t want to lose your property, you must take action to pause levies or have the lien removed. But whether you’re negotiating an OIC, starting a payment plan, or filing as CNC or bankrupt, this pauses the clock.
In other words, the IRS will stop the timer whenever they cannot collect unpaid taxes from you. But if you are neither paying nor negotiating, you risk losing your home, vehicle, financial assets, and other property. And each month that you carry a balance, the IRS adds more penalties and interest.
So, it’s often not advisable to “wait it out.” When all is said and done, your CSED may be much longer than ten years from your tax assessment date. During that time, there’s too much at stake.
Can You Ever Get IRS Debt Forgiven?
In rare circumstances, you may have your federal tax debt is forgiven if you’ve been consistently unable to pay down your balance. Sometimes, minimizing your negotiation attempts can ensure that the 10-year clock continues ticking.
However, you should always seek guidance from a qualified tax professional before trying to wait out the CSED.
Tip: Keep close track of all communications with the IRS. This can help you identify active negotiation periods and better predict your CSED. It’s also a general best practice even if you pursue other debt-relief options.
Is State Tax Debt Eligible for Forgiveness?
Note that state taxes are not necessarily subject to the 10-year statute of limitations. Some states are less lenient in pursuing back taxes. If your tax debt is primarily state taxes, consult with a tax professional to explore your relief options.
How to Get Federal Tax Debt Relief
Waiting for forgiveness is often a difficult and risky strategy. Consult with an experienced tax consultant before attempting it. If you believe your CSED is drawing near and you still owe taxes, a tax professional can help you make the best decision.
Overall, though, there are many options for tax debt relief. Payment plans, Offers in Compromise, and filing as Currently Not Collectible may extend your 10-year timer, but they can also protect your assets and help you get out of debt sooner. In some cases, the IRS may settle for less than you owe. Check with a qualified tax professional to discuss the best methods for your unique situation. They can help you with Offers in Compromise, calculating your CSED, and more.
You have options for escaping the burden of tax debt. Click the image below to request your consultation with an experienced tax debt expert.