If you owe the Internal Revenue Service taxes and can’t afford to repay what you owe, the IRS offers many administrative options for resolving your outstanding liabilities while avoiding many of the pitfalls associated with ignoring the IRS’s efforts at enforced collections, including federal tax liens, bank levies, and wage garnishments. This page is designed to serve as an overview of the various options that exist to resolve your tax liability with the IRS, what the IRS refers to as “collection alternatives,” and the policies and procedures you should be familiar with before attempting to resolve a tax issue with the IRS.
A Note on Current Compliance:
With the exception of a hardship Currently Not Collectible designation (see more on this option below), the IRS will require you to be in “current compliance” with your tax obligations before they will work with you to establish a collection alternative. Generally speaking, current compliance means having filed tax returns for at least the last six years and being current with any estimated tax or withholding requirements for the current year.
Installment Agreements:
The IRS offers several types of installment agreements. The type of installment agreement that you’ll qualify for depends on a number of factors, including the size of your liability, your ability to pay based on IRS collection standards, and the amount of time that the IRS has remaining to collect on the liability.
Streamlined Installment Agreements:
The term Streamlined Installment Agreement is generally used to refer to any installment agreement for which the IRS will not require you to make a financial disclosure in order to qualify. If you’re able to comply with the terms of a streamlined installment agreement, this is often a great option for resolving your balance, as it is typically much quicker (and therefore cheaper) to establish.
Agreements under $50,000:
The most common type of streamlined installment agreement is for those that have an assessed balance of tax, penalties, and interest of less than $50,000. It is important to note that in determining whether a taxpayer qualifies for this agreement, the IRS does not consider penalties or interest that have accrued but have yet to have been formally assessed. As the IRS includes these amounts in balance due notices it sends to taxpayers, it is possible you may qualify for a streamlined installment agreement and not even realize it. In order to get the balance of tax, penalties, and interest that has been formally assessed, you’d have to either contact the IRS or obtain your IRS account transcripts.
Streamlined installment agreements for balances below $50,000 require that a taxpayer agree to pay a monthly amount to the IRS sufficient to satisfy the balance outstanding over 72 months (6 years) or the monthly amount necessary to fully repay all of the outstanding balances before they expire, whichever is greater. Aside from saving the time and expense associated with formally negotiating with the IRS collection alternative, one of the main benefits of a streamlined installment agreement for balances below $50,000 is that the IRS will generally agree not to file federal tax liens as a condition of entering into a streamlined agreement.
Agreements between $50000-$250,000:
Following the success of their Expanded Test Criteria Installment Agreement provisions which were in effect between 2016 and early 2020 (and which expanded a taxpayer’s ability to enter into an installment agreement without the need to provide a full financial disclosure to balances of up to $100,000), the IRS released an internal procedural update on March 11, 2020 that created new “Non-Streamlined Installment Agreement” guidelines. These new guidelines allow taxpayers with balances up to $250,000 to enter into an installment agreement with the IRS, without the need to provide the IRS with a financial disclosure or negotiate regarding your ability to pay. Rather, so long as the taxpayer can commit to a monthly repayment that will fully repay the liability in 84 months, or an amount sufficient to pay the each of the the liabilities before they’re set to expire, the IRS will agree to enter the taxpayer into an agreement, regardless of the taxpayer’s financial situation or ability to pay. This program has greatly expanded our ability to quickly and efficiently establish installment agreements for clients that are willing and able to pay the balances they owe, but are disinclined to work with the IRS directly. Even if you agree to a non-streamlined installment agreement that provides for a full repayment, there may be other avenues to reduce your total tax bill, including First Time Abatement or Reasonable Cause Abatement.
Partial-Pay Installment Agreements (PPIAs):
A partial-pay installment agreement is an installment agreement for a monthly amount that is insufficient to fully pay the taxes you owe before the time-period that the IRS has to collect on the taxes (what’s known as the Collection Statute Expiration Date, or “CSED”). Partial-pay agreements are based strictly on your ability to pay, both out of current income and equity in assets. In order to qualify for a PPIA, you must complete and submit a Collection Information Statement to the IRS that shows a limited ability to pay based on current income and equity in assets.
Full-pay Installment Agreements:
Many taxpayers find themselves in situations where they don’t have the ability immediately pay what they owe, but do have the means to pay off the liability in full over time. If your balance exceeds the threshold necessary to qualify for a streamlined or non-streamlined installment agreement, you will need to prepare a Collection Information Statement and negotiate with the IRS regarding your ability to make monthly repayments. Often times taxpayers will have expenses that exceed IRS standards or are otherwise deemed to be non-allowable for the purposes of determining one’s ability. Even if your balance disqualifies you from a streamlined or non-streamlined installment agreement, if you can agree to repay the balance in full in six years, the IRS will generally agree to such a plan, even if they determine a greater ability to pay; they will also generally allow you a year of smaller payments in order to make the financial changes necessary to meet your payment obligations long-term.
Many taxpayers wind up with IRS liabilities because of unforeseen financial hardships leave them unable to pay their tax bills. While the IRS will generally expect that you do what is necessary to stop incurring liabilities in the future, the IRS will not expect you to make payments towards your past tax liabilities if doing so would create a financial hardship on your or your family. However, in order to demonstrate to the IRS that making monthly payments towards your back taxes would create a financial hardship, you need to provide the IRS with a Collection Information Statement, a full financial disclosure in which you must disclose your household income and expenses to the IRS. In situations where you cannot agree to repay the IRS over the course of six-years, the IRS will only consider allowable expenses that they have deemed to be necessary living expenses. These expenses are published online by the IRS as Collection Financial Standards. Some of the standards are national standards, while others are based on where you live and the size of your family. The IRS will closely scrutinize the Collection Information Statement of any taxpayer requesting a Currently Not Collectible designation, and minor discrepancies on the form can make the difference between a Currently Not Collectible designation and the determination that you can afford to making monthly payments towards your back taxes. For this reason, it’s advisable to have an experienced tax professional prepare the Collection Information Statement on your behalf to ensure that your financial position is accurately relayed to the IRS.
It is important to note that a Currently Not Collectible designation will not make your tax debt go away, but it will put a stop to IRS collection efforts until your financial situation improves. However, while in Currently Not Collectible status, the IRS’s statute of limitations to collect (CSED) is not put on hold. While the IRS does reserve the right to review your ability to pay in the future, if your financial situation doesn’t improve before the IRS runs out of time to collect on the liability, the liabilities will be forgiven. This makes Currently Not Collectible a particularly attractive option for taxpayers whose liabilities are close to expiration and have no present ability to pay their back taxes out of monthly income or equity in assets.
Offers in Compromise:
An Offer in Compromise is an agreement entered into between a taxpayer and the IRS to settle a tax liability for less than the full amount owed. Not every taxpayer will qualify for an Offer in Compromise, and convincing the IRS that it is in its best interest to accept less than the full amount of tax owed is often a lengthy, complex process. Because the IRS’s time to collect on a liability is paused while an Offer in Compromise in under consideration (often over a year) and penalties and interest continue to accrue on the balance during this time, it is very important to fully understand the likelihood of the IRS accepting an Offer in Compromise and the parameters of an accepted Offer in Compromise prior to submitting one. We’re well equipped to provide you the guidance and advocacy necessary to ensure that you’re well-positioned to have an Offer in Compromise accepted by the IRS for the lowest amount possible.
Innocent Spouse:
There are a several different forms of relief that fall under the IRS’s umbrella of “Innocent Spouse” relief. The various forms of Innocent Spouse relief are generally intended to protect unwitting taxpayers from the understatement or underpayment of tax liabilities stemming from items of income belonging to their spouse on jointly filed tax returns.
Penalty Abatement:
While there is generally no way to avoid the payment of accrued interest on an IRS tax debt (aside from having an Offer in Compromise accepted by the IRS), there are provisions whereby the IRS will grant relief from penalties. The two main types of penalty relief available to taxpayers are First Time Penalty Abatement and Reasonable Cause Penalty Abatement.
IRS Appeals:
The IRS’s frontline Collections employees, namely Automated Collection System employees, Revenue Officers, and Offer examiners will often reject proposals erroneously or without giving adequate consideration to a taxpayer’s financial situation and IRS official guidance. There are various methods by which to appeal an IRS decision, and knowing the proper avenue and timing for requesting an appeal can mean the difference between achieving the desired outcome and winding up back at square one with your attempts to resolve your tax issue.
Passport Revocation:
In 2015, President Obama the FAST Act, in which Congress instructed the IRS to refer those with over $50,000 (adjusted for inflation) owed in tax, penalties, and interest to the State Department for passport denial and revocation. The IRS has begun implementing these procedures. If you’ve received a CP508C Notice notifying you that your debt has been referred to the State Department as being seriously delinquent, contact us to discuss your options for reversing the certification.
State Resolution:
Each state has its own rules for the assessment and collection of taxes. The attorneys at O’Connor and Lyon have represented taxpayers in controversies with nearly all of them. If you’re dealing with a state liability or state audit, please contact us so we can discuss the particulars of your situation.
Audit:
If the IRS selects your return for examination, they’ll expect you to demonstrate that your return was completed accurately. If you can’t, you’ll likely face additional assessments and steep accuracy-related penalties. The best audit defense is generally a good offense; the more complete and organized your substantiation (i.e. the less work the Revenue Agent assigned to the case has to do), the better the chances for a favorable outcome. Even if you no longer have all the records to substantiate items claimed on your returns, there are alternatives for arguing for their allowance. The worst thing you can do during an audit is nothing; that’s a surefire way to a quick, gross over-assessment. Even if you were audited in the past, the IRS has procedures whereby you can request the IRS reconsider a prior audit if they failed to consider all the facts and supporting documentation associated with that tax year.
IRS Notice Glossary: (coming soon)