Federal Income Tax Statute of Limitations Tolled during Bankruptcy

Tax debts commonly survive a bankruptcy case. The general rule is that a tax debt must be at least three years old before it can qualify for discharge in bankruptcy. Additionally, the tax debt must have been “assessed” 240 days before the bankruptcy filing. “Assessment” is a tax term that means the IRS has determined the tax obligation. Filing a return is only a “self-assessment” and gives consent to the IRS to assess the taxpayer’s tax obligation. Sometimes nailing down the assessment date is difficult, so it is recommended to seek this information directly from the IRS.

When a tax debt is not discharged in bankruptcy, the IRS has ten years to collect a delinquent income tax debt from the date it was “assessed.” See 26 U.S. Code § 6502. However, filing a bankruptcy case tolls this ten year period for the time the bankruptcy is pending plus 6 months. See 26 U.S. Code § 6503(h). This is important to know for any remaining tax that is not discharged by the bankruptcy case.

For instance, suppose the following scenario:

May 1, 2014:              2013 tax debt assessed by IRS

July 1, 2014:               Debtor files Chapter 7 bankruptcy

November 1, 2014:     Bankruptcy case closes, tax debt is not discharged.

Since the debtor filed bankruptcy, the time the IRS has to collect on the debt is ten years, plus the time in bankruptcy (four months), plus an additional six months. That extends the statute of limitations deadline, what the IRS calls the Collection Statute Expiration Date (CSED), from May 1, 2024, to March 1, 2025.

The IRS is required by law to provide information on the CSED, and taxpayers may contact the IRS at 800-829-1040 to ask about the expiration date. However, be warned that the IRS has recently publically acknowledged that its CSED calculations have been flawed. During a recent audit of 75 tax cases with calculated CSEDs, 39 percent of these cases contained errors. Just another reason to not trust the IRS.

Some debt issues linger after a bankruptcy filing. If you have debts that were not discharged during your bankruptcy case, discuss your situation with an experienced attorney to learn of your legal options.