Understanding IRS Tolling Events & Statute of Limitations for Small Businesses

What Is a Tolling Event? 

In tax terms, a tolling event is any action or situation that pauses or extends the IRS’s deadline for taking action on your taxes. Think of the IRS’s statute of limitations as a countdown clock. Normally, the IRS has 3 years to audit your tax return and assess additional tax, and 10 years to collect any tax debt from you. After they expire, the IRS generally can’t initiate an audit or enforce collection of that tax. 

However, when a tolling event occurs, it’s like hitting the “pause” button on that clock. The countdown stops for a while, giving the IRS extra time equal to the pause (the clock resumes where it left off once the event is over). In short, a tolling event suspends or extends the statute of limitations, preventing it from running out as originally scheduled. 

The statute of limitations itself is a legal time limit. Below we’ll explore common tolling events and their impact on these deadlines. 

Common Tolling Events That Affect Businesses 

Certain events common to business taxpayers can trigger a tolling of the IRS deadlines. Here are some of the most frequent tolling events and how they work: 

How Tolling Affects the Statute of Limitations

Audit Tolling: The 3-Year Rule for IRS Audits 

For income tax returns, the clock for auditing a return starts ticking once you file the return. However, certain circumstances extend this 3-year audit window. 

For example, if you significantly underreport your income (generally by omitting more than 25% of your gross income), the statute of limitations for an audit is extended to *6 years. Even more importantly, if you fail to file a tax return at all or file a fraudulent return, there is no time limit for the IRS to audit and assess tax for that period. This means a return with major omissions or fraud can be examined by the IRS long after the usual three-year period has passed. 

It’s also worth noting that in some situations a taxpayer may voluntarily agree to extend the audit period. For instance, during an ongoing audit, the IRS might ask you to sign a waiver (often on Form 872) to give them more time to finish their examination. This is not automatic tolling but a negotiated extension.

Collection Tolling: The 10-Year Rule for IRS Collections 

Once a tax liability is assessed (for example, when you file a return with a balance due), the IRS generally has 10 years to collect that tax. This 10-year countdown is known as the Collection Statute Expiration Date (CSED) – after that date, the remaining tax debt is typically unenforceable. If a tolling event occurs, it’s as if the countdown timer stops for a while and then resumes once the event is over. The time during which the clock was stopped is added to the IRS’s collection period. 

To visualize it, imagine the 10-year period as a stopwatch: if you hit pause (because of a tolling event), the stopwatch isn’t counting down during that pause. Once the event is resolved, the clock picks up again from where it left off. 

For example, if you submit an offer in compromise or request a payment plan and it takes, for instance, 4 months to get a decision, those 4 months don’t count toward the 10-year limit (and a little extra time may be added, such as 30 days after an offer rejection). As a result, the actual time the IRS has to collect can stretch beyond 10 years – sometimes several years longer – depending on which tolling events occurred. 

Why Tolling Events Matter for Business Owners 

Tolling events and extended statutes of limitations can have real impacts on your business’s tax strategy and financial health. Here’s why understanding these events is so important: 

• Protecting Your Rights: If a tolling event extends the deadline, you need to know that – otherwise you might assume the IRS can’t come after you when in fact they still legally can. Knowing where you stand helps you enforce your rights and avoid unwelcome surprises. 
  
  
• Impact on Settlements and Strategies: The amount of time left on the IRS clock can affect how you approach resolving a tax debt. For example, if the IRS only has a short time left to collect (say one year), you might have more leverage or might even choose to wait it out, depending on the situation. In contrast, if the IRS has all 10 years (or more, due to tolling) remaining, they may be less inclined to compromise. 
  
  
• Credit and Financing Implications: Unresolved tax debts often lead to federal tax liens, which can affect your business’s assets. While the major credit bureaus no longer include tax liens on credit reports, a lien can still affect your ability to secure financing. If a tolling event extends the collection period, that means a lien could stick around longer than 10 years, continuing to cloud your business reputation. 
  
  
• Financial Planning and Peace of Mind: From a planning perspective, it’s critical to know when you can finally close the book on a particular tax year or tax debt. Tolling events can push those dates out, which affects budgeting and long-term decisions. 

How to Track and Respond to Tolling Events

Keeping on top of tolling events is part of good tax management for a business. Here are steps you can take to track these events and respond appropriately: 

1. Review Your IRS Transcripts 
2. Keep a Timeline of IRS Communications and Actions 
3. Work with a Tax Professional 

Tips to Avoid Unintended Tolling 

While some tolling events are voluntary and sometimes necessary, others can be avoided with good practices. Here are some proactive tips to prevent accidentally extending the IRS’s time window: 

• File Tax Returns On Time (and Don’t Skip Years): The single best way to avoid open-ended audit exposure is to file your returns timely. When you file on time (or at least file eventually), you start the clock on the IRS’s assessment period. If you never file a return, that clock never starts. 
  
  
• Avoid Frivolous or Incomplete IRS Submissions: Before you submit something like an Offer in Compromise or any application to the IRS, make sure it’s realistic and complete. An ill-prepared request that has no chance of approval will still likely count as a tolling event, extending the statute for no benefit. To avoid this, do your homework or consult a professional before filing such requests. 
  
  
• Keep Financials and Records Up to Date: Many tolling events involve providing information to the IRS (for example, financial statements for an installment agreement or offer, or documentation during an audit). By keeping your financial records organized and current, you can respond to IRS requests quicker. 

Finally, always communicate with the IRS proactively if you’re in a situation that might toll the statute. For instance, if you’re going to request a payment plan, understand the timeline and try to submit everything in one go. 

The goal is to resolve matters efficiently so that you’re not prolonging the period that the IRS can enforce collection or keep an audit open. 

IRS tolling events can be tricky, but you don’t have to manage them alone. If you’re concerned about how tolling events may have affected your tax situation, consider reaching out to a tax professional. 

Contact a LedgerFi qualified tax advisor to review your IRS transcripts and develop a proactive plan. By getting expert help, you can be sure you’re not caught off guard by extended IRS deadlines and can make informed decisions to protect your business’s financial future. Don’t wait – a consultation now can save you from costly surprises later.