By A.J. Gross, C.P.A., E.A.
Owing back taxes is a heavy burden. Especially if there is a limited ability to pay the taxes owed. If you are in this situation, it is good to know the Collection Statute End Date. There is a set period of time the IRS and the State of Michigan have to collect back taxes.
Collection Statute End Date (CSED) is the time period the government can enforce collections. The CSED is different for IRS taxes compared to State of Michigan taxes. Once the CSED has expired, the government has no legal right to enforce collections such as bank levies, wage garnishments, and property seizures.
The CSED for IRS back taxes is 10 years. Once 10 years have passed, the IRS will remove the tax owed and release the tax lien. For example, 2004 personal income taxes are owed. The 2004 tax return was filed on 5/1/2005. On 5/1/2015, 10 years later, the CSED has lapsed and the IRS will remove the tax owed and tax lien. There are actions that can extend the CSED. These actions include filing an appeal, filing bankruptcy, and other legal proceedings.
The collection statute for Michigan taxes is far more complicated compared to the IRS collection statute. The CSED for Michigan taxes is 6 years. This seems simple. However, after 6 years, the state doesn’t remove the taxes. The state will stop collection enforcement action after the 6 year period but you will always owe the taxes. The state will not remove back taxes from your account until the tax is paid.
After the Michigan CSED has passed, the state will not remove the tax lien. The tax lien will remain until the tax debit has been satisfied. A Michigan tax lien is valid for 7 years. The state has the option to extend tax liens at any time within the 7 year period. If there is a state tax lien attached to property and the property is sold, the state will get a share of the proceeds. Even after the CSED period.
It is easier to extend the Michigan CSED. Actions that extend the CSED are filing bankruptcy, voluntary payments, filing an appeal, and other legal proceedings. The big one in this list is voluntary payment. Every time a voluntary payment is made, the CSED extends for 6 more years. For example, you are in financial hardship. The state agrees to an installment agreement for $25 per month. Every $25 payment made extends the CSED 6 more years. The CSED for Michigan taxes has to be carefully considered.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com or www.ALGTaxSolutions.com
This column was printed in the July 12, 2015 - July 25, 2015 edition