Limitation on Collections

Under the collection power of the IRS, once a tax has been assessed and proper notice given, the taxpayer is subject to summary non-judicial collection procedures (liens and levies) available to the IRS to collect the assessed tax.

Internal Revenue Code § 6502 provides for the statute of limitations for collection after assessment. Code § 6503 provides some rules for when the statute of limitation is suspended. These sections reflect the modifications made by the Restructuring and Reform Act of 1998 (P.L. 105-206, § 3461(a)(2)) (RRA 98) and The American Jobs Creation Act of 2004, section 6159.  RRA 98 eliminated the unlimited ability of the parties to extend indefinitely the statutory period for collection by agreement and substituted a fixed bright line time period.

A transition rule is in effect for any request to extend the period of limitations made on or before December 31, 1999. Under this rule, if a taxpayer agreed to extend such period beyond the 10-year period referred to in section 6502(a) of the Internal Revenue Code of 1986, such extension shall expire on the latest of:

  • (A) the last day of such 10-year period;`
  • (B) December 31, 2002; or
  • (C) In the case of an extension in connection with an installment agreement, the 90th day after the end of the period of such extension.

There are several situations when the statute of limitations for collection is suspended. Those that the Clinic deals with usually are: petitions (§ 6503(a)), bankruptcy (§ 6503(h)), offers in compromise (§ 6331(k)), situations when the tax lien is reduced to judgment, while certain installment agreements are pending, and when certain levies are prohibited (§ 6331). The taxpayer’s transcript will show the information from which the student can compute the correct statute of limitations.

  • If the taxpayer files a valid and timely Tax Court petition, Code § 6503(a) provides that the IRS cannot assess or collect any unpaid tax until the Tax Court decision becomes final and for 60 days thereafter.
  • Section 6503(h) suspends the period for collection for the period the individual is in bankruptcy plus 6 months thereafter. The student can determine this period from the dates on the transcript and/or the PACER information. If a taxpayer files a bankruptcy petition after a notice of deficiency is mailed but before the 90-day period (150 days if taxpayer is out of the country) expires, the 90-day period is suspended from the date the bankruptcy petition is filed until the taxpayer is discharged or dismissed, plus 60 days.
  • The statute is suspended for any period that an offer in compromise is pending plus 30 days thereafter and, if an appeal of such rejection is filed within such 30 days, during the period that such appeal is pending. The pending date begins the date the Service accepts the offer for processing. Section 6331 (k)(1).
  • Under Code § 7403, the United States can bring an action in United States District Court to reduce the tax claim to judgment thereby extending the original statute date.
  • In general, if a taxpayer submits an installment agreement, the statute of limitations is suspended while the agreement is pending and for a period of 30 days following rejection or termination. There are exceptions to this general rule. Prior to the effective date of The American Jobs Creation Act of 2004, Code § 6159 provided for installment agreements only for “satisfying the liability.” The law changed the words to “make payment on” and inserted “full or partial.” This appears to have created two types of installment agreements. There is a full-pay installment agreement that must be paid over no more than 3 years and for which there is no waiver of the S/L or no extension of the CSED. See IRM 5.14.2

The newly created installment agreement is the Partial Payment Installment (PPIA) Agreement (i.e. installment agreements that do not provide for full payment of the liabilities.)  IRM 5.14.2.1(9) limits the extension of the waivers to 5 years plus 1 year. The use of the waiver is limited by policy to those in I.R.M.  § 5.14.2.2.3.

I.R.M. § 5.14.2.2.3 states that generally a waiver should not be secured on PPIAs. There are examples where these waivers are suggested such as where an asset will come into the taxpayer’s possession

  • Under Code § 6331(i)(5), the statute of limitations is suspended when levies are prohibited and Code § 6331(k)(2) prohibits levies while an installment agreement is pending and for 30 days following rejection or termination.

Prior to collecting the tax, a statutory Notice and Demand for payment must be mailed by the IRS to the taxpayer. Section 6303 of the IRC sets forth that the Secretary shall, as soon as practicable, and within sixty days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount of tax owed and demanding payment thereof.  Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person’s last known address. It is important for the student attorney to make sure the IRS has complied with the notice and demand requirements. However, the failure of the IRS to send timely notice and demand after the assessment of the tax will not render the assessment void. The assessment will remain valid but IRS will be barred from utilizing its lien and levy collection powers. Blackston v. U.S., 778 F.Supp. 244 (D.Md.1991); see also Brewer v. U.S., 764 F.Supp. 309 (S.D.N.Y.1991) (stating that in order to place a lien against property, the IRS must make valid assessment of taxes, provide notice of deficiency to taxpayer, and provide notice and demand for payment of assessed tax).

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