The Impact of IRS Inefficiency on Tax Collections

The IRS has a reputation for being relentless when it comes to collecting taxes.

However, what happens when the agency fails to do its job in a timely manner? What happens when the IRS delays working on cases? Can the IRS benefit from delaying the collection of taxes and denying taxpayer claims? Can the IRS use its own inefficiency as a collection tool?

The United States v. Ryals, 480 F.3d 1101 (11th Cir. 2007), case provides an opportunity to consider this question. It presents a fact pattern whereby the IRS was able to delay processing paperwork which allowed the IRS to hold open its collection period for several decades.

Facts & Procedural History

Ryals owed taxes for tax years 1977 and 1978. The U.S. Tax Court found Ryals liable for these taxes in 1989. The IRS assessed the taxes in 1989. The tax, penalties, and interest were approximately $500,000.

By March 2003, this tax liability had grown (due to tax penalties and interest) from just over $500,000 to just over $1,500,000.

Between 1989 and 2003 Ryals was convicted of a tax crime and he submitted two offers in compromise that were rejected by the IRS. The IRS filed suit against Ryals for the unpaid tax debt in 2003.

The question for the U.S. Tax Court was whether the IRS’s collection statute had expired. One would think that it would have expired, as the tax balances were from 30 years prior.

About the Collection Statute Expiration Date

The “collection statute expiration date” or CSED refers to the time period the IRS has to collect unpaid taxes.

The authority for the CSED is found in Section 6502. The general rule is that the IRS has ten years from the date of assessment to collect taxes owed by a taxpayer. This period can be extended in certain circumstances, such as when the taxpayer enters into an installment agreement or makes an offer in compromise.

Because the CSED starts on the date of the assessment, we have to also consider the assessment rules. The statute of limitations on assessments is found in Section 6501. The general rule for assessments is that the IRS has three years from the date of the filing of the tax return or two years from the date of payment, whichever is later, to assess taxes.

Did the IRS Miss the CSED?

This brings us back to this case.

The taxes were assessed in 1989. This period was suspended when the taxpayer submitted an offer in compromise (“OIC”). The OIC was submitted on August 18, 1997 and he faxed the IRS a letter withdrawing the OIC in January 7, 2000. This tolled the CSED.

The taxpayer then submitted another OIC on June 14, 2000. The IRS rejected the offer on March 12, 2002. This tolled the CSED.

The government filed suit to collect the taxes on May 20, 2003.

The court did the math and concluded that the CSED expired 19 days after the IRS filed suit.

The Policy in Allowing Late Collections

Should the IRS be able to collect taxes from the late 1970s that were assessed in the late 1980s in 2007? The concept that creditors cannot collect after a certain period of time runs throughout American jurisprudence. Whether it is debts owed to third parties or liability for past actions, statutes of limitations preclude bringing suit years after the fact. Even the courts provide for the dismissal of claims if a party does not actively pursue their cases.

This is the very concept of the OIC—it is intended to provide taxpayers with a “fresh start.” The idea is that someone should be able to come into compliance and not have to live their entire lives subject to unpaid taxes.

In this case, at least some of the delay was due to the IRS not processing the OICs timely. Should the IRS be able to hold open the CSED by simply being inefficient in carrying out its duties? Does the IRS owe more to taxpayers than this?

The Takeaway

This case shows how the CSED works. The CSED is the time period the IRS has to collect unpaid taxes, which is generally ten years from the date of assessment. This period can be extended in certain circumstances. In this case, the court concluded that the CSED had expired 19 days after the IRS filed suit to collect taxes owed for the years 1977 and 1978, which were assessed in 1989. The case raises questions about whether the IRS should be able to hold open the CSED by being inefficient in carrying out its duties and whether the agency owes more to taxpayers. Ultimately, the case underscores the importance of understanding the various statutes of limitations on tax assessments and collections and their impact on taxpayer rights and obligations.