Is Time Running out? Statute of Limitations for Tax Collection
Breakfield, Robert, Alvis, Charles, The National Public Accountant
Is Time Running Out?
Practitioners who assist taxpayers with controversies within the jurisdiction of the Internal Revenue Service Collection Division must be aware of the statute of limitations as it relates to the collection of assessed taxes. The general rule is that the Service must commence judicial proceeding or administrative collection action to enforce collection within six years from the time the tax is assessed. (1) Statute of limitation rules for collection of the tax should be distinguished from the limitation period the Service has to assess a tax. (2) This article considers situations in which the Service has determined the correct tax due and has assessed a deficiency.
IRC Sec. 6502 provides that the time begins to run against the Service at the time the assessment has been recorded. (3) The assessment is deemed to arise when the commissioner (or his designate, an assessment officer) signs the assessment list. (4) In practice, evidence of this act is the Assessment Certificate, Form 4340, which is completed by an assessment officer at the service center. (5) Assessment does not take place at the time the taxpayer files his tax return. (6)
The statute of limitations for collection begins to run at the time the Service assesses the tax in the case of a fraudulent return or where no return has been filed. (7) The practitioner must not confuse the assessment of a tax in these cases with the collection of the tax assessed. In the case of a fraudulent return or where no return has been filed, there is no time limit to bar the assessment. (8) However, once the tax has been properly assessed, the Service must commence collection action within the six-year time period or it will barred by the statute. (9)
When a practitioner accepts a collection case, he or she must determine when the assessment was recorded at the service center and if the taxpayer ever executed Internal Revenue Service Forms 900, 656 or 2750.
There are several ways to extend the six-year period, the most common way of which is for the taxpayer to execute a "Tax Collection Waiver," IRS Form 900. The taxpayer may also extend the statute if he submits an offer to compromise the tax owed, IRS Form 656, which states that the taxpayer agrees to extend the six-year statute for the period the offer is under consideration plus one year. (10) In the case of a tax collection waiver, the period of extension is specifically designated by the taxpayer and the service representative. (11) In cases where the taxpayer is the target of a proposed 100% penalty assessment, Form 2750 is used. This form states that the IRS and the taxpayer agree to the extension of the period for assessment of the penalty. (12)
Internal Revenue Code Section 6503 sets forth other circumstances by which the statutory period may be extended, (13) including cases where the assets of the taxpayer are under contol or custody of a court (for example a Chapter 11 bankruptcy case) (14) where the taxpayer has been outside the United States for at least six months, (15) or where the Service has wrongfully seized property which had been in the custody of the taxpayer but is owned by a third party. (16)
The government is forced to make choices as the expiration date of the statute of limitations draws closer. When the taxpayer has assets, the government must either commence enforced collecton actions by administrative levy and seizure or request that the Justice Department (local U.S. attorney) commence a tax lien forclosure proceeding under IRC Section 7403. (17) Although it is not necessary for the Service to collect the tax by the end of the six-year statute, it must have commenced collection action (18) by that time. Filing the lawsuit is sufficient in a 7403 suit. (19) However, a notice of seizure must be served in administrative action cases. (20)
More difficult cases for the Service concern taxpayers who have no assets available for levy on lien foreclosure and cases where the assets available are not sufficient to liquidate the tax due. …