How IRS Collection Expiration (CSED) Affects Bankruptcy

The Collection Statute expiration date, or CSED, is the time frame the IRS has to collect on the debt. When you file for bankruptcy, the CSED can be stopped, giving you more time to get rid of the debt. The timing of your bankruptcy filing is key to understanding how it affects the IRS’s ability to collect and whether the debt can be discharged.

What Is The Collection Statute Expiration Date

The Collection Statute expiration date is an important date that, once reached, disallows the IRS from collecting your tax debt. In other words, your tax debt will expire after this date, and you will be free from it. The statute of limitations on this debt is 10 years from the date of assessment.

The date of assessment will be one of two days:

• April 15th (Tax Day) if you filed by this date, or
• The date you filed your taxes if you filed later than April 15th.

How Bankruptcy Filing Influences The IRS Collection Statute Expiration Date

Bankruptcy pauses the statute of limitations for the duration of the case, as the IRS is subject to the automatic stay and is legally prohibited from collecting. Additionally, once your bankruptcy is complete, the IRS will add 6 months to the clock. These circumstances are the same whether you file for Chapter 7 or Chapter 13 bankruptcy.

Strategic Considerations For CSED & Bankruptcy Timing

Usually, Chapter 7 bankruptcy takes about 3 to 6 months to finish, while Chapter 13 bankruptcy can take anywhere from 3 to 5 years. Because Chapter 7 is relatively short, its impact on the Collection Statute Expiration Date (CSED) is typically minimal. Chapter 13 may have a more significant effect, as it pauses the CSED for a longer time. But again, neither type of bankruptcy is going to save the taxpayer from paying back the tax debt.

When & How Tax Debt Can Be Discharged Through Bankruptcy

Some tax debts may be discharged in bankruptcy, depending on specific eligibility requirements. If your debt is not able to be discharged, the IRS will resume collecting once your bankruptcy is over. To determine if your debts can be discharged, they must fall into the following categories:

• Your tax return was due at least 3 years before the bankruptcy filing.
• You filed your return at least 2 years before the bankruptcy filing.
• The tax was assessed at least 240 days before the bankruptcy filing.
• The debt is not the result of fraud or tax evasion.

How Bankruptcy Lawyers Time Bankruptcy Filings With CSED

There are several ways bankruptcy lawyers will coordinate bankruptcy filing with the statute of limitations on tax debt:

• Letting CSED Expire Before Filing: If you have tax debts that cannot be discharged AND you are close to the CSED, your lawyer might recommend letting the debt expire before filing for bankruptcy.
• Avoiding the CSED Pause by Filing Too Early: Because bankruptcy pauses the CSED during bankruptcy plus 6 months, your lawyer might recommend waiting to file for bankruptcy. This allows time for your tax debts to become dischargeable and prevents the IRS from adding too much time to the CSED.
• Using Chapter 13 for Non-Dischargeable Tax Debt: If your tax debt is not dischargeable and the CSED is years away, you could consider filing Chapter 13 bankruptcy. You will pay your tax debt through the payment plan and will not be charged interest or penalties.

Final Thoughts On IRS Collection Expiration & Bankruptcy

In conclusion, understanding how the Collection Statute Expiration Date (CSED) interacts with bankruptcy is crucial when dealing with tax debt. While bankruptcy can provide some relief, it’s important to carefully consider the timing of your filing to ensure that it works in your favor. By discussing your situation with an experienced bankruptcy attorney, you can make informed decisions about whether to let the CSED expire or use bankruptcy strategically to address your tax debt.

This article was written by McFarlane Law, PLC, a Scottsdale-based firm focused on tax litigation and dispute resolution. With years of experience handling IRS and Arizona tax issues, their team is dedicated to helping clients navigate complex tax matters with clarity and confidence.