Let’s talk a
bit about the tax statute of limitations.
There are
two limitations periods, and it is the second one that can lead to odd results.
(1) The first one is referred to as the
limitations on assessments. This is the three-year period that we are familiar
with. The IRS has three years to audit your return, for example. If they do
not, then – in general – the opportunity is lost to them.
There are a number of ways to extend the three-year period.
When I was young in the profession, for example, tax practitioners would “hold
back” certain tax deductions until the client was closing-in on the three
years. With a scant few and breathless days remaining before the period
expired, they would file amended tax returns, thereby obtaining a refund for
the client and simultaneously kneecapping the IRS’ ability to look at the
return.
The rules have been revised allowing the IRS additional time when
this happens. I have no problem with this change, as I consider the previous practice
to be unacceptable.
(2) The second one is the collections
period, and this one runs ten years.
Say you filed your return on April 15, 2014. You got audited
and the IRS assessed $15,000 on December 15, 2015. The IRS has ten years –
until December 15, 2025 – to collect.
There are
things that can extend (the technical term is “toll”) the collections period.
Make an offer in compromise, for example, and the period gets tolled.
Sometimes
tax practice boils down to letting the ten-year period click-off, hoping that
the IRS does not initiate action. It happens. A few years ago I had a client
who had moved to Florida, remarried and had her new husband involve her in an
unnecessary tax situation. It was extremely unfortunate and she was extraordinarily
ill-advised. He passed away, leaving her as the remaining target for the IRS to
pursue. She had a fairness argument, but that meant as much as a snowball in
July to IRS Collections. They have a different mind frame over there.
So I am
looking at a case where a taxpayer (Grauer) had an issue with his 1998 tax
return. He filed it late (in 2000). That
was his first problem. He owed around $40 grand, which quickly became almost
$58 grand when the IRS was done tacking-on interest and penalties. That was his
second problem. He could pay that much money about as easily as I can fly.
In 2001 he
signed a waiver, extending the ten-year collections period.
What makes
this point interesting to a tax nerd is that someone would not (knowingly) sign
a waiver without something else going on. In fact, Congress disallowed this in the late
nineties, responding to perceived IRS abuses - especially in Collections.
Sure enough,
the IRS said that he signed an installment agreement in 2001 (around the time
of that waiver), but that he broke it in 2006
Grauer said
that he never signed an installment agreement.
It was now 2013,
and off to Tax Court they went.
The Court
looked at the account transcript, which showed that the IRS had issued an
earlier Notice of Intent to Levy. This was
an immediate technical issue, as the Court would not have jurisdiction past the
first Notice. The IRS persuaded the Court that the transcript was wrong.
COMMENT: Your transactions with the IRS go to your “account.”
That account is updated whenever a transaction occurs. The posting will include
a date, a code, and sometimes a dollar amount and perhaps a meaningful
description. Some codes are
straightforward, some are cryptic.
The Court
next observed that Grauer asserted that he had not signed a payment plan. In
legal jargon, this was an “affirmative defense,” and the IRS had to prove
otherwise. The IRS argued that its transcript was correct and that Grauer was
incorrect.
The Court
was a bit flummoxed by this response. The IRS was having it both ways.
The Court
told the IRS to “show us the installment agreement.”
The IRS
could not.
The Court went
on to describe the IRS account transcript as “indecipherable and unconvincingly
explained.”
The Court
decided for the taxpayer.
Remember:
ten years had passed. The waiver needed to attach to something. In the absence
of something, the waiver fizzled and had no effect.
The statute
had expired.
Did the taxpayer
get away with something?
I don’t
know, but think about the alternative. Let’s say that the IRS could post
whatever it wanted – to speak bluntly, to make things up – to your account. You
then get into tax controversy. You are required to prove that the IRS did not
do whatever it claimed it did. Good luck to you in that scenario. I find that result
considerably more unacceptable than what happened here.
