What is the statute of limitations on IRS debt
Did you know that the Internal Revenue Service (IRS) can’t collect tax debts over 10 years old?
Sounds great, but it doesn’t tell the whole story.
By the end of this article, you’ll understand why delaying payments is like playing with fire—and learn some powerful strategies to help eliminate this debt burden once and for all.
Statute of limitations on IRS debt
Does tax debt expire? Yes, there’s a limit to how long the IRS can come after you for unpaid tax debts.
The IRS generally won’t pursue overdue tax collection after 10 years. This period is known as the Collection Statute Expiration Date (CSED).
However, waiting out the decade-long period might not be a great idea. Avoiding tax debt invites several consequences and complexities. Here are some critical details you should be aware of:
- Collection: At any moment, the IRS can initiate aggressive collection action, like bank levies and wage garnishment.
- Extended clock: There are numerous reasons why the IRS may extend the CSED period. For example, living outside the United States or filing for bankruptcy can delay the period by months. In other words, even waiting 10 years is no guarantee the debt will be cleared.
- Liens: The IRS can file a tax lien on your proertpy. This can harm your credit score and prevent you from selling your home until the debt is paid.
- Additional costs: When waiting out the tax debt, interest and other additional potential costs will grow. If you ultimately end up paying, the amount may be larger than if you had covered it promptly.
- Legal fees: You may eventually need the help of a lawyer or tax specialist. This expertise can be costly.
In short, unless you want ten years of sleepless nights, don’t piss off the taxman.
Debt relief options
When it comes to debt relief, you have numerous options at your disposal. While these options apply to debt broadly, they can just as easily be used to tackle tax debt.
While it’s not for everyone, a do-it-yourself approach can be effective in the right hands. Of course, it’s best for self-motivated individuals who can stick to a plan without help. If you’re unsure where to start, consider using one of the many programs available online:
- Debt snowball method: An approach that attacks the smallest balances first. For example, if your outstanding tax obligation is your smallest debt, you’d start by prioritizing it over all others. By attacking the smallest balance first, you build momentum and are more likely to stick to a plan.
- Debt avalanche method: It’s like the debt snowball method but prioritizes debts based on the highest interest rate. This ensures the most expensive debts are tackled first.
- Debt snowflake method: Encourages debtors to make small and unexpected debt payments (“snowflakes”). The idea is to use any bonus money, like income from a garage sale, to help reduce debt. This method values the fact that every little bit helps.
- Minimum payment method: This straightforward approach has a debtor making minimum payments on each obligation. Many people like this method for its simplicity.
Negotiate directly with creditors
Debtors sometimes have success reaching an agreement directly with creditors. However, negotiating a lower debt balance can harm your credit score.
Many debtors use credit counseling services. Often, they are non-profit organizations that offer assistance free of charge. Numerous services are typically provided:
- Free budget counseling: They help clients create a budget after reviewing their current financial snapshot (i.e., income, expenses, assets, and debts). The goal is to identify savings opportunities and improve financial management.
- Debt management plans (DMPs): With a DMP, the debtor pays the credit counseling agency a single monthly payment for all their debts. The agency then takes on the responsibility of distributing the payments to the creditors.
- Financial education: Credit counseling agencies frequently offer free workshops like managing credit card debt.
- Bankruptcy counseling: In the United States, you must undergo counseling from a government-approved organization before declaring bankruptcy.
- Credit report reviews: Agencies help debtors understand their credit report, like how their score was calculated and ways it can be improved.
- Referrals: Even when credit counseling agencies don’t have all the answers, they can likely point you in the right direction.
Debt settlement companies
Debtors don’t need to negotiate directly with creditors. Sometimes, it can be wise to use the services of a debt settlement company that will negotiate on your behalf.
These companies not only negotiate with creditors, they also facilitate the repayment process.
Debt consolidation involves taking out a new loan and using the proceeds to pay off multiple existing debts. Once the current debts are cleared, the debtor is left with a single monthly payment, ideally with a lower interest rate.
A variety of debt consolidation loans exist:
- Personal loans: While they can be used for other purposes, they are commonly used for debt consolidation. They can be obtained from banks, credit unions, or online lenders.
- Home equity loans: These are considered secured loans since your house is required as collateral. Because of this, your home is at risk if you default on the payments.
- Balance transfer credit cards: Transfering multiple high-interest credit card balances to one with a lower rate can be an effective debt reduction strategy. Issuers often have favorable introductory rates like 0% APR for the first year.
- 401(k) loans: It shouldn’t be your first choice, but sometimes borrowing from your retirement account to pay down debt makes sense. However, it’s critical to understand the consequences. Failure to repay the borrowed funds within a set period can result in taxation on the redemption. It can also lead to a 10% penalty for those aged 59 ½ and younger.
- Student loan consolidation: The U.S. Department of Education offers a Direct Consolidation Loan. It allows borrowers to combine eligible federal student loan debt into a single balance. While the interest rate remains unchanged, consolidation helps simplify debt management.
- Bankruptcy: Declaring bankruptcy is a serious matter. If you’ve exhausted other approaches, it might be a suitable option. The process allows debtors to discharge certain debts entirely but will negatively impact your credit for multiple years.
Face your debts head-on
Does IRS debt go away? Yes.
Does that mean you should ignore payments? Of course not.
While there is a limit to how long the taxman can come after you, don’t wait for it to reach that point. Long before the 10-year time period is up, the IRS will likely pursue action against you.
Meanwhile, delaying could affect your credit, financial well-being, and ability to enjoy a restful sleep.
Of course, sometimes, debtors fall into bad luck for no fault of their own.
If you find yourself drowning in tax debt, consider one of the many reduction strategies you have at your disposal.