The Internal Revenue Service does not have forever to collect a tax debt. From the time the IRS assesses a tax liability, the collections clock is ticking. The IRS has three years from the date of a tax return to assess a tax liability from that return, and it has 10 years to collect it.
The statute of limitations for conducting an audit is governed by section 6501(a) of the Internal Revenue Code, which establishes a three-year limit on the number of years that can elapse prior to an audit. The collections period is governed by Section 6502(a)(1) of the Tax Code and Tax Regulation section 301.6502-1, establishing 10 years as the amount of time that the IRS can allow to elapse prior to collection. After 10 years, under normal circumstances, the IRS cannot collect the debt.
Exceptions for Fraud
If there is reason to believe you have committed willful tax evasion or have filed a fraudulent return, and you omitted over 25 percent of your actual taxable income from your return, the IRS may conduct an audit of your taxes at any time for up to six years after you filed.
Applicability to Offers in Compromise
The 10-year statute comes into play when the IRS enters into negotiations for either accepting payments on a tax liability, or accepting offers in compromise. For example, the IRS will typically not accept any payment or compromise arrangement that will not be completed by the time the statute of limitation expires on the tax liability. However, the IRS and taxpayer can extend the statute of limitations by mutual agreement.
You should keep your receipts, returns and other tax documentation for up to six year from the time of filing. This is the maximum length of time the IRS has to audit your returns, even if it suspects fraud or misrepresentation. Additionally, if you expect to need to enter into a payment plan, the sooner you come clean with the IRS, the longer the period of time available to make payments. Your scheduled payments can potentially be lower and easier to manage.