If you’re living in the United States and file all your returns on time, the IRS typically has 10 years to collect a tax debt from you. If you holdout against the government for a decade, your tax debt will be deleted from the system and collection efforts (not including existing liens on real estate) will stop.
I say that you must file your taxes on time because the 10 year collection statute starts when you submit the return. Thus, if you file your 2015 tax return in 2020, your 10 year collection period for tax year 2015 runs from 2020 to 2030.
If you never file your tax returns, your collection statute on the resulting tax debt never starts to run. Likewise, if you file your personal return, but forget your FBAR or offshore corporate return (Form 5471), the collection statute never begins to run on these reports.
Side note: Don’t confuse the collection statute with the audit statute. The IRS audit statute is generally 3 years, and sometimes 6 years or more and determines how far back the IRS can go when auditing your returns. Like the collection statute, if you never file your returns, the audit statute never begins to run.
Now let’s get back to the collection of tax debts from U.S. expats. The basics of the IRS collection statute are these:
As I said, the IRS typically has 10 years to collect from you once a tax is assessed. A tax is assessed when you file a return, an audit is completed and your appeals run their course, or the government computers prepare a return for you based on whatever information they may have (called a substitute for return).
If you never file a return, and the IRS doesn’t prepare one for you, the IRS collection statute never starts.
The IRS collection statute is placed on hold whenever the IRS is prohibited by law from collecting from you. This is usually when you file an Offer in Compromise, a Collection Due Process request, or bankruptcy. These can delay the IRS collection statute for many months or years.
Not to bury the lead, but the IRS collection statute is also put on hold while you are out of the United States. More specifically, Sections 6502 and 6503(c) of the U.S. Tax Code work together to extend the collection statute if you are out of the U.S. for “a continuous period of six months or more.”
That is to say, if you are out of the U.S. for any six month period, the IRS collection statute is extended. If you return every few months, and are never gone for six consecutive months, then the IRS collection statute is never tolled.
IRS Collection Statute for Expats
If you incur a U.S. tax debt while living abroad, and you never set foot in America, the collection period never starts. If you incur a tax debt and immediately move abroad, again never visiting the U.S., the collection period (basically) never starts.
Conversely, if you’re visiting family in the U.S. every few months, even for a day or two and thus never out of the country for a continuous period of at least six months, the IRS collection statute is running and the debt will expire in 10 years.
If you incur a U.S. tax debt while abroad, and then return to the U.S., the collection statute starts when you touch down. So, if you are traveling to America from time to time, you might want to make sure you are never out for six months.
There is one more minor issue for expats. If you are out of the U.S. for six months or more, and when you return the IRS collection statute is about to expire, the statute is automatically extended for six months.
Basically, if you are out of the country for six months or more, the IRS will always have six months after your return to get you and your assets.
Now let’s talk about the practical implications of the IRS collection statute on expats. Most of you will find that the IRS computers stop sending you bills, and that your debt will drop off and out of the system, after ten years.
If the great collector ever gets its act together, and compares the travel days claimed on IRS Form 2555 filed with your personal return, expats with tax debts might well have an issuehave a problem. Also, if you are audited, and the agent figures out that the collection statute should have been tolled, they may resume collection actions.
So far, this has not happened and the collection statute is running… at least the computers are processing bills as if the debts have expired.
If you want to know how much you owe the IRS, you can phone them and ask for a Transcript of Account. This will tell you which years show a balance due, as well as the tax, interest and penalties that have accrued.
If you know you owed for a particular year, and think the 10 year collection statute may have run, you can call the government and ask the status of a particular year. Though, I wouldn’t mention to them you are living abroad.
I will close by reminding you that the IRS can and does revoke passports if you owe more than $50,000 in back taxes. Many international passport offices have begun refusing to renew passports for Americans abroad, and I expect this to increase in 2017.
For more on how the IRS can revoke your passport, see:
I hope this article helps to clarify the IRS collection statute and how it applies to expat tax debts. If you have any questions, feel free to call or send an email to info@premieroffshore.com.
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