Limitation on Collections

Internal Revenue Code § 6502 sets out the statute of limitations for collection after assessment. Code § 6503 provides 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.

The law now provides that:
In any request to extend the period of limitations made on or before December 31, 1999, 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.

It was the intent of Congress to eliminate the waiver practice under the Restructuring and Reform Act of 1998 (RRA 98), and to nullify any existing waiver agreements, subject to a transitional window.

Absent a statutory exception, if the taxpayer files a valid and timely Tax Court petition, the IRS cannot assess or collect the unpaid tax until the Tax Court decision becomes final. 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.

Prior to formally assessing 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).

Under the collection power of the IRS, once a tax has been assessed and proper notice given, the taxpayer is subject to the summary nonjudicial procedures available to the IRS to collect the assessed tax, in particular the lien and levy powers.

A lien is placed on the taxpayer’s property after the taxpayer receives a statutory Notice of Lien and a levy occurs after the taxpayer receives a statutory Notice Of Intent to Levy.

Student attorneys should request hearings to appeal these actions within the 30-day statutory period. Failure to do so may result in a failing grade in the Clinic.

If the taxpayer wishes to pursue this right to appeal the student attorney should prepare a completed form 9423 (Collection Appeal Request) or 10153 for the taxpayer.

Several actions will suspend the statute of limitations on collection:

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

Section 6503(h) tolls 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.

The offer statute is covered in the offer section of this web site, and is delineated on the Form 656. The statute is suspended for any period the offer 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. I.R.C. 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.

The installment agreement provision in the statute is more complex and depends on the kind of installment agreement. 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. 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.

However, RRA 98 sets a 10 year absolute end-time on the statute of limitations except for most installment agreements.  Internal Revenue Manual § 5.1.19.6.5 states that a waiver will only be executed in connection with the granting of a partial payment installment agreement and only in certain situations under 5.14.2.2, and there is policy that limits this to no more than five years plus up to one year to account for changes in the agreement.

The CSED (which is the statute date) is suspended as of March 9, 2002 during

  1. the time an installment agreement is pending
  2. 30 days following rejection of an installment agreement
  3. thirty days following termination of an installment agreement, and,
  4. during any appeal of termination or rejection of the installment agreement.

This section makes plain that the CSED is not suspended while an installment agreement is in effect.

IRM 5.14.2 deals with collection statutes and the Partial Payment Installment Agreement.

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.

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

For most of our clients, they can freely enter into an installment agreement regardless of kind and it will generally not extend the statutory period for collection.

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