TJ writes: "I got behind on my taxes in 1995 and 1996. I got a letter from IRS yesterday. They want me to pay $68,007 for 1995 and $4351 for 1996. There is no way I can come up with that kind of money. A friend told me there is supposed to be a three year statute of limitations, so how can IRS come after me ten years later?"
As many a business owner has discovered, it is much easier to get behind on taxes when no one is withholding pay-as-you-go installments from each paycheck. You go through the year feeling as if you´re doing pretty well; the following April you get hit by a tax bill equal to something like 100% of your year-to-date net income, and you face a choice: you can eat and make your house payment, or you can pay the taxes; not both. It´s amazing how often this sort of thing happens, sometimes even to experienced business owners. Generally, the mortgage lenders and grocery stores win out over the U.S. Treasury, and the tax bill sits there and grows. TJ, you´re not alone.
As with most tax questions, there is no one simple answer. The three-year period your friend mentioned sets a limit on the length of time IRS has to challenge the amounts you report on your tax return and assess additional taxes. The clock starts running on the day the tax return is due, or the day it´s filed, whichever comes later. This is why you need to keep receipts, bank statements, and so forth for at least three years after you file, to support the amounts shown on your return.
There is a different set of rules for limitations on the length of time IRS has to collect taxes. You did not mention when you filed your returns for those years, but assuming you filed both returns on time without any extensions, the statutory period for collections would have expired for your 1995 taxes in April of this year, and there would be almost six months to go before IRS would be barred from taking action to collect 1996 taxes. Does this means you can breathe a sigh of relief and forget about the $68,007? Maybe. Maybe not.
A number of events can extend the Collection Statute Expiration Date (the date by which IRS collections activities must end):
— filing an Offer in Compromise
— filing a bankruptcy petition
— applying for a Taxpayer Assistance Order
— being out of the US for more than six consecutive months
— voluntarily agreeing to extend the collection period (at various times, voluntary extension of the collection period has been required in order to set up an installment payment plan)
— appealing a federal tax lien (Collection Due Process Appeal)
— filing a petition in Tax Court
If you´re not sure when you filed or if any of the above events occurred, you can request a transcript of your account from IRS. The transcript will show dates for filing, additional assessments by IRS, payments, bankruptcy filings, offers in compromise, and other events that could effect the time limit for IRS collections.
Calculating the actual Collection Statute Expiration Date can be challenging, as the method of calculating extensions has changed several times over the years. For details, see the Internal Revenue Manual, Part 25, Chapter 6, section 9 (http://www.irs.gov/irm/part25/ch06s10.html).