There is an interesting paradox occurring in our federal government. While it appears that the IRS Collection Division is increasing its efforts to collect unpaid taxes, it is also increasing the use of tools that delay the collection of tax. This allows cases to be resolved even though the taxes are not currently paid and is terrific news for taxpayers who are currently unable to afford their past-due tax debts. If we look forward a few years, however, we may see the pendulum swing back the other way to hit these taxpayers hard.
Traditionally, to resolve a past-due tax liability, the most readily available options were (1) the full payment of the tax debt, (2) an offer in compromise to settle the debt for less, or (3) an installment agreement that would pay off the full liability over time. These days, however, our clients may be seeing an increased availability of a few lesser-used tools offered by the federal government: uncollectible status or partial payment installment agreements. Both of these tools punt the ultimate collection of the tax liability and implicate questions concerning the collection statute of limitations.
When a taxpayer’s financial circumstances are sufficiently tough as to prevent him from making any meaningful payments against an outstanding tax debt, the IRS may (upon review of submitted financial statements) agree that the taxpayer should be deemed uncollectible, at least for the time being. Such a classification is intended to give a taxpayer a break from paying down an outstanding tax debt. The temporary reprieve may fall between one and two years. The IRS is supposed to revisit the matter after the stay expires and can monitor the taxpayer’s financial status through any filed tax returns. If circumstances have changed so as to allow that taxpayer to begin making payments, the IRS will resume collection activities.
Similarly, the IRS is allowed to enter into partial payment installment agreements. These too take into account the taxpayer’s financial circumstances. These plans permit the IRS to enter installment agreements that, based on the amount of the installments, would not full-pay the outstanding liability within the time remaining on the collection statute of limitations. Such installment agreements are also intended to be temporary and may be revisited in a fashion similar to those cases in uncollectible status.
What the IRS has to watch out for is that, once a taxpayer is classified as uncollectible or put in a partial payment installment plan, the case is not forgotten. The IRS collection agents are currently overwhelmed and cases can fall through the cracks. Where a case does get forgotten, the fortunate taxpayer can receive a significant windfall when the 10-year collection statute of limitations expires on the tax debt.
Subject to certain events that can toll the limitations period, the IRS generally has 10 years from the date of assessment to collect an unpaid tax debt. It is not hard to imagine that with an increased use of partial payment installment plans and uncollectible status, more cases could brush up against or pass this 10-year mark. This does not mean, however, that crossing your fingers and hoping to be forgotten is a sound planning technique. In most cases the IRS will revisit the case at a later date and additional interest will have accrued on the debt.
If the IRS revisits the case shortly before the statute of limitations expires, it has another tool at its disposal which can extend the time for collecting an unpaid tax. If the tax debt is substantial enough, the government may bring an action in the federal District Court to reduce that tax liability to a judgment. By doing so, it effectively prolongs the statute of limitations by invoking the state statute of limitations on the collection of a judgment. In Wisconsin this will give the IRS an additional 20 years.
Given this apparent trend in the IRS, it is easy to anticipate an increase in such actions in the next 10 years. Due to the commitment of resources required to carry on a District Court action, it is not likely that the taxpayers with minimal tax debts will be pursued through judgment but many others could be. If the IRS does increase its collection efforts via judgment, those currently benefiting from these favorable resolutions could be looking at an effective 30-year collections period.
Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414-270-2538 or firstname.lastname@example.org.