Like consumer debt, tax debt is quite common in the U.S. Many tax defaulters believe that their debt will be wiped off after ten years, but is this always this case? Will the IRS forgive your tax debt after 10 years?
In some cases, the IRS wouldn’t stick to the typical ten-year statute of limitations on tax debts which are related to other tax relief options that taxpayers may try to obtain before the end of the period.
For example, if a certain taxpayer files for an offer in compromise, they cannot have their debt cleared after the 10-year period ends.
There exist other situations that may force the IRS to ignore the ten-statute of limitations and collect tax debt even after 10 years. So if you find yourself in these situations, be rest assured that the statute of limitations won’t protect you. Why don’t we look at them?
Does the IRS Forgive Tax Debt After 10 Years?
While surfing the net, you stumbled upon the statute of limitations which prevents the IRS from pursuing 10-years old tax debt, but you aren’t sure if this is true because it looks too good to be. The 10-year statute of limitations, as it is called, exists, but one important thing you should know is that the IRS doesn’t always adhere to it, especially in some situations.
The IRS will ignore the statute if a person files for an offer in compromise. This offer enables the person to settle a part of what they owe without having to pay the total sum. The IRS will also ignore the statute if the taxpayer files for bankruptcy or signs a waiver form as part of enrollment in an installment scheme. Lastly, individuals living outside the United States at the time the period ends won’t be protected under the statute; this means that the IRS will collect its money even after the 10-year duration.
If your tax debt lacks protection under the statute, the IRS will have extra time to collect the money you owe. The extra time it has, the more tools it’ll have to clear up your account. The agency may decide to adopt stringent tactics like imposing a tax levy or lien to lay claim to your precious assets. If you work for an employer, you may have your wages garnished for a certain period to fund the repayment of the money you owe. While all these run through your mind, you should note that the IRS won’t request consent before it takes these drastic actions.
So before you start rejoicing at the thought of your tax debt being erased based on the 10-year statute, you should ensure that you don’t find yourself in the above mentioned situations. Rather than depending on the protection of the 10-year statute of limitations, why don’t you focus on how to become debt-free? If you are struggling with credit card debt, focus on how to get rid of credit card debt.
What is the IRS?
If you are a taxpayer, you should be very familiar with the agency you pay your tax to; the IRS. But what is the IRS?
The Internal Revenue Service (IRS) is an agency of the United States whose job is to collect taxes and enforce tax laws (like the wash sale rule).
The IRS has been in operation for several decades. In fact, the agency was established by one of the founding fathers of the United States: President Abraham Lincoln in 1862. This agency operates with the full backing of the United States Department of the Treasury, and its main duty includes the collection of individual income taxes, including employment taxes.
The agency is also in charge of corporate, gift, excise, and estate taxes, including mutual fund dividends. Due to their primary purpose, some people do refer to this agency as the “tax man.” The IRS has its headquarters in Washington, D.C.
What does the IRS do?
This agency may be one of the most profitable, dreaded, and prominent agencies in the U.S., but have you ever sat down and asked yourself this question “what does the IRS do?”
- Administer Tax Laws
- They Handle the Processing of Tax Returns and Collect Revenue
- Ensure That Tax Laws Are Obeyed
- Help Taxpayers
Administer Tax Laws:
It is the job of this agency to administer tax laws, and it does this by giving out guidelines and regulations.
They Handle the Processing of Tax Returns and Collect Revenue:
Based on statistics, in the year 2017, this prestigious agency processed over 245 million tax returns (including supplemental documents) and collected over $3.4 trillion in gross taxes.
Ensure That Tax Laws Are Obeyed:
It is one duty of the IRS to ensure that all tax laws are adhered to. They execute this by auditing taxpayers and sanctioning businesses or individuals who take part in fraudulent activities. If you fail to pay your taxes, the agency could attempt to collect it from you through means like civil action and/or could take you to court. You could get rid of debt collectors easily, but it’s not always the same with the IRS, so make the necessary effort to pay your taxes before it’s due.
Help Taxpayers:
The IRS doesn’t only go after defaulting taxpayers; they also assist those in need of assistance. One of the agency’s goals is to help taxpayers understand and adhere to their duties, and it tries to achieve this goal by providing taxpayer helpline. If you reside outside the United States, operate a business, or need assistance with estate taxes, excise taxes, or other taxes, the IRS has provided numbers to call.
Though the IRS has multiple duties, this agency has a very transparent goal. The duty of this bureau is to offer the American taxpayers with top-notch services by helping them grasp and adhere to their tax responsibilities and enforce the law without any iota of prejudice or unfairness.
What Will Trigger an IRS Audit?
So many words trigger fear in the mind of taxpayers, and “audit” seems to be topping that list. But rather than being concerned about the IRS auditing your returns, you should be more concerned about the question, “what will trigger an IRS audit?”
Below are a few suggestions:
- If You File a Return With Erratum
- If You File a Schedule C
- Take the Home Office Cut
- Lose Money Frequently
- Fail to File or File Incomplete Returns
- Have a Massive Alteration in Income or Expenses
If You File a Return With Erratum:
Mistakes be it in addition or subtraction, will surely be discovered, and when this happens, your return will be flagged for an audit. It doesn’t matter if the mistake is to your favor or in favor of the IRS. Since the tax software do all of your calculations, you will be protected from this particular red flag.
If You File a Schedule C:
Several business proprietors will have to submit a schedule C report to report business earning as part of their personal tax returns. This is true of sole proprietorship, which constitutes a large portion of small businesses. Schedule C will indicate the profit and loss your company makes, but it will also raise the possibility of your tax returns to be audited. To be sincere, there is nothing you can do about this. The only sensible thing you can do is to ensure that you have all the required documentation for all your assertions.
Take the Home Office Cut:
If you frequently work at home in a space set aside for your business, you can remove some of the cost of that area from your income tax. The IRS will definitely query you for this, but if the action is legitimate and will help you save adequate cash, it is surely worth it.
Lose Money Frequently:
Some taxpayers who claim to be wise, attempt to expunge what they spend on a vacation, or other hobbies like they are declaring expenses as deductions for legit businesses. If your company fails to indicate a profit for a significant part of the last few years, the IRS may contact you to ascertain if you are really operating a true business venture.
Fail to File or File Incomplete Returns:
Even if your business recorded a loss rather than profit, you would still havefile tax returns. If you decide to vanish from the surface of the earth, be rest assured that when you show up, the IRS will call you in for an explanation. The same goes for filing an incomplete tax return. Even if what is missing is a signature, you will be called in for questioning.
Have a Massive Alteration in Income or Expenses:
If you recorded a profit of $50,000 last year and just $12,000 this year, the IRS would be eager to know what happened. Also, you will be audited if your tax returns indicate a significant rise from year to year. This shouldn’t discourage you from making enough money, just ensure that it is well documented along with the expenses you are claiming.
What Are the Red Flags for an IRS Audit?
Your tax returns will be audited if the IRS notices certain red flags. Your knowledge of these red flags can help you escape the unpleasant auditing process. So, what are the red flags for an IRS audit?
- Making Huge Cash
- Refusal to Report Foreign Bank Account
- If You Have a Sketchy Tax Preparer
- Mixing Personal Expenses and Business
- If You Run a Business That Handles Huge Cash
- If You Make Use of Your Car for Business Reasons
Making Huge Cash:
A huge percentage of the returns that undergo audits are owned by businesses that earn more than a million dollars each year. If your annual income is less than a million dollars, your odds of being audited are lesser than business owners who make six figures each year.
Refusal to Report Foreign Bank Account:
If you own an account overseas, ensure they are well reported. This denotes that you have to electronically file for FinCEN form 114 to report such accounts with a sum of $10,000 at any time during the previous year. Individuals who own several financial assets overseas may also have to submit their tax returns with an IRS form 8938.
If You Have a Sketchy Tax Preparer:
Sometimes the reason why your tax returns was flagged for an audit is because of something your tax preparer did. If the individual who prepared your tax returns promises a substantial refund without requesting to view proper documentation for deductions and credits, you shouldn’t buy it.
Mixing Personal Expenses and Business:
Irrespective of what you are claiming, be it entertainment, travel, or any expenses, ensure that the deductions are made for business purposes. Ensure that your expenses are in relation to your business. Your receipts should be well kept and state the business purpose for each expense. Do not take cuts for household gadgets or personal gifts.
If You Run a Business That Handles Huge Cash:
If you operate a business that handles lots of money, you are very likely to be audited by the taxman. The IRS has observed that cash business proprietors are fond of forgetting to declare some cash income that should be stated in their tax returns. They, therefore, ensure that these businesses are well-targeted. Businesses such as laundromats, car washes, including beauty salons, are more likely to be audited.
If You Make Use of Your Car for Business Reasons:
This is one area individuals use to their advantage. Because of this, the IRS always looks keenly. Aside from the cost of commuting, small business proprietors can claim business-related car expenses on their taxes. But just like entertainment and travel, ensure that you keep correct records like mileage logs, including calendar entries that state the business purpose because taking this cut can raise your chance of being audited.
What Is the Statute of Limitations for the IRS?
The statute of limitations is a law that states a period of limitation for the execution of actions of some sort. The statute of limitations for IRS informs taxpayer of the duration of certain actions.
- Statute of Limitation to Claim a Tax Refund
- Statute of Limitation to Audit Your Tax Returns
- Statute of Limitation to Obtain Outstanding Tax Debts
- Statute of Limitation for Amending a Tax Return
Statute of Limitation to Claim a Tax Refund:
Based on the IRS statutes of limitations, you have three years starting from the date of the actual deadline for your tax return to possess any refund that is yours. For instance, if your 2020 tax return is due on May 15, 2020, you have till February 15, 2024, to file your 2020 tax return and still obtain any refund that you are entitled to.
Statute of Limitation to Audit Your Tax Returns:
According to the IRS statutes of limitations, the agency has just 3 years to audit your tax returns. This due date is calculated from the day you file your tax return unless your tax return was filed before the due date.
Statute of Limitation to Obtain Outstanding Tax Debts:
Here is the most common statute of limitations, known as the 10-year statute of limitations. According to this limitation, the taxman has 10 years to obtain outstanding tax debts. The deadline is usually calculated from the day a tax liability has been completed. The statute of limitation can be suspended in some situations (they are discussed at the beginning of the article).
Statute of Limitation for Amending a Tax Return:
Based on this statute of limitations, taxpayers must correct their tax return within three years of the actual filing date.
How Does the IRS Check Tax Returns?
By now, you should be aware that the primary duty of the IRS is to check tax returns and collect revenue, but have you asked yourself how “How does the IRS check tax returns?”
The IRS does this with the aid of a computer program known as the Discriminant Inventory Function System (DIF). This program is like a watchdog made to indicate fraudulent tax returns that are filed.
If the program detects fraudulent activity on your tax returns, it will be flagged, and you will get an IRS review letter. Getting a review letter from the agency will send a momentary chill down your spine, even if you have no skeleton in your cupboard. To avoid being flagged, ensure you thoroughly scrutinize your return.
Conclusion:
The United States generates a huge percentage of its revenue from the taxes you pay, so you will be wrong if you believe that the 10-year statute of limitations will protect you in all cases. If you are finding it hard to pay your taxes, you can consider enrolling in programs designed by the IRS for delinquent taxpayers.
