U.S. Tax Clock Stops While In Mexico

But your interests and penalties keep barreling down the highway
BY: ORLANDO GOTAY

The IRS is going through tough times. In recent years, Congress “punished” the agency by providing it a super lean budget. The shutdown also left it with millions of unopened letters and mail. The IRS Ombudsman estimates it will take a year to get back to normal.

One of the things Congress did to the IRS was to require that inactive collection accounts be turned over to Private Collection Agencies. Those were old accounts the IRS felt had little collection potential. Off to work PCAs went, and we have some results. They are not very good at collecting. And when they were able to reach the taxpayer and the taxpayer wanted to set up a payment plan, somehow it fell through. I’ll add- it was tried before, and this time around it seems like yet another fiasco.

Why, you would say, do I take time to write about this? Well, for any of my readers that may have outstanding IRS debt, it is always important to know a few things. Generally, once the tax liability is assessed (imagine the entry in the government’s ledger “Joe owes us X dollars”) the government has ten years from that date to collect. So it’s easy to say “why can’t I just wait this out if the debt is old?”

You should know the 10-year collections clock comes with that “exceptions apply” language we often see in ads. One you should know about: if a taxpayer is outside the U.S., the collection clock stops until the taxpayer returns to the U.S., then it restarts six months thereafter. Otherwise, it stops forever.  If, in the course of your conversation with one of these folks, they learn that you like real margaritas and tacos, instead of their north-of-the-border facsimiles, your collection file will be coded such that the debt will not expire.

The other consequence is that those debts continue accumulating penalties and interest. It’s not difficult to see how old tax debt can balloon up to the magic debt level that would make you eligible for passport non-renewal or cancellation.  You see, they have all kinds of persuasive methods.

Another way in which this can be addressed is through a payment plan that takes into account your living expenses versus your income, or through an offer in compromise where a sum is offered in exchange for release of all liabilities. Whether one or the other is convenient depends on one’s individual circumstances.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.  This is just a most general outline. It is informational only and not meant as legal advice.