One of my biggest fears as a new Enrolled Agent(EA) was doing a disservice to a tax representation client. Can I be honest with you? It's still one of my biggest fears. It's probably safe to assume that messing up is one of your biggest fears too.
That's one of the reasons I created the Tax Pro's Representation Journey. I wanted to create a community to address the biggest fears that EAs have and to help them avoid the mistakes that I have made in my career. Thank goodness, unintentionally extending the collection statute expiration date (CSED) not been one of them.
Unfortunately it is a mistake that I see a lot of tax professionals make. The CSED doesn't have to be something that works against your client. Instead, when you understand what the CSED is you can learn how to utilize it as a tool against the IRS.
In this article I'm going to breakdown what the CSED is, ways that it you can extend it, and how to use it to your client's advantage. Why is extending it important to note? Because if you extend it without strategy you're not only costing your client time but they're going to pay more of the tax they owe. Potentially more in penalties and interest as well. So let's take a look at what the CSED is.
What is the Collection Statute Expiration Date (CSED)?
The collection statute expiration date (CSED) is the last date that the IRS can legally collect on a tax debt. This includes penalties and interest associated with the debt. The IRS generally has 10 year to collect taxes owed. This time clock begins when the IRS has assessed the tax, not when your client files the tax return. This is important to note because many people think the clock begins when the tax return was due.
Let's say that your client did not file their 2020 tax return until January 2023. The IRS didn't assess and post a balance due until February 14th, 2023. The time clock for the IRS to collect on the debt begins on February 14th, 2023. Not January 2023 when the IRS received the return and not 2021 when they should have received it. This means the IRS will have until February 14th, 2033 to collect on the debt.
The same tax year can have multiple CSEDs. That's because the IRS can assess a new tax amount in addition to the original amount. A few of those reasons are:
An amended return results in additional taxes owed.
Changes from an audit
Civil penalties
Certain penalties and interest.
For example, I worked with a client that had a bad habit of writing bad checks. Well they received a penalty for a dishonored check. The IRS assessed this penalty and it had its own CSED instead of it adding to the original CSED.
Doing a transcript investigation is important to every representation case. One reason is because you are able to figure out what the CSED is for each year that has a balance. If you're not familiar with what all it entails check out The Tax Representation Workflow.
Using the CSED paired with a proper client intake will point you to which negotiation option is a best fit for your client. But what happens if you accidentally add on to the CSED?
How do you extend the collection statute expiration date (CSED)?
Typically the IRS is not going to ask a taxpayer to file a return that's more than 6 years old. So why would you do that? Because you don't know any better. But in the world of tax that's not an excuse there are too many resources and mentorship programs for you to go at this blindly. When you file a return that's older than 6 years old the IRS will accept it and guess what. Your client will get hit with a failure to file penalty of 25% of whatever the taxed owed is. The IRS will also assess interest retroactively in addition to a failure to pay penalty. So while not understanding the tax law and filing requirements you've just added more to the tax liability and given the IRS an additional 10 year so to collect from your client.
But since you're here I'm assuming you are looking for guidance. You can subscribe to this article subscription for weekly representation tips. Or you can level up and join the Tax Pro's Representation Journey where I give you insights every week via podcast, articles, and in the community to help you avoid mistakes like the one above.
There are some other things that extend the CSED. You should understand these things so that you can communicate them with your client while you are negotiating. That way they aren't in for any surprises when they find that the IRS has more time to collect from them.
Those things are: