Owing money to the IRS can be stressful, particularly when the balance is far more than you can afford to pay. Many taxpayers assume they have only two choices: pay the IRS in full or wait and hope the problem goes away.
Fortunately, that is not the case.
The IRS has several tax-resolution programs for individuals and businesses that cannot immediately pay their federal tax liabilities. Depending upon your financial circumstances, you may be able to establish an affordable monthly payment, settle the debt for less than the full amount owed, temporarily suspend collection activity, or reduce certain penalties.
The important question is not simply, “How much do I owe?” It is which IRS resolution option is appropriate for my particular financial situation?
1. IRS Installment Agreements
An installment agreement allows you to pay your tax debt through monthly payments rather than paying the entire balance at once.
For many taxpayers, this is the most straightforward way to resolve an IRS collection problem.
The IRS now offers what it calls Simple Payment Plans to many qualifying taxpayers. In general, an individual owing $50,000 or less in assessed taxes, penalties, and interest may qualify if all required tax returns have been filed and other requirements are satisfied.
Taxpayers who owe more than $50,000 may still qualify for an installment agreement, but the IRS may require additional financial information regarding income, expenses, assets, bank accounts, investments, and other financial resources.
The amount you owe can therefore make a significant difference in how an installment agreement is negotiated.
2. What If You Cannot Afford the IRS’s Proposed Monthly Payment?
This is where tax-resolution cases often become more complicated.
The IRS does not necessarily determine an affordable payment the same way a taxpayer does. When financial disclosure is required, the IRS generally examines the taxpayer’s income, assets, and allowable monthly living expenses.
Certain actual household expenses may be limited by IRS financial standards.
As a result, a taxpayer who believes there is little or no money left at the end of each month may discover that the IRS believes considerably more is available to pay the tax debt.
A careful analysis of the taxpayer’s finances can therefore be extremely important before submitting a Collection Information Statement such as Form 433-F, Form 433-A, or Form 433-B.
3. Partial Payment Installment Agreements
Some taxpayers simply cannot afford monthly payments large enough to pay their entire IRS debt before the collection period expires.
A Partial Payment Installment Agreement (PPIA) may be an option in appropriate cases.
Under a PPIA, the IRS accepts monthly payments even though those payments are not expected to fully satisfy the tax liability before the applicable Collection Statute Expiration Date.
These agreements typically require detailed financial disclosure and may be periodically reviewed by the IRS. Nevertheless, for the right taxpayer, a PPIA can provide an effective resolution when full payment of the tax liability is unrealistic.
4. Offer in Compromise: Can You Settle IRS Debt for Less?
You have probably seen advertisements claiming that taxpayers can settle thousands of dollars of IRS debt for “pennies on the dollar.”
An Offer in Compromise (OIC) is a legitimate IRS program, but qualifying is considerably more complicated than many advertisements suggest.
An Offer in Compromise allows the IRS to accept less than the full amount owed when the taxpayer satisfies the applicable requirements. In determining whether an offer based upon inability to pay should be accepted, the IRS examines factors such as:
- Cash and bank accounts
- Equity in real estate
- Vehicles
- Investments
- Retirement accounts
- Business interests and other assets
- Monthly household income
- Allowable living expenses
- Future ability to pay
The IRS uses this information to evaluate the taxpayer’s collection potential.
For that reason, the size of the tax debt alone does not determine whether someone qualifies for an Offer in Compromise.
A taxpayer who owes $200,000 does not automatically qualify for a settlement simply because the debt is large. Conversely, a taxpayer with substantial tax debt and limited assets, income, or future ability to pay may have a strong case for an Offer in Compromise.
A financial analysis should generally be performed before submitting an offer to determine whether the taxpayer is a realistic candidate.
5. Currently Not Collectible Status
What happens when a taxpayer cannot afford any meaningful payment to the IRS?
In appropriate circumstances, the IRS may place the account into Currently Not Collectible (CNC) status.
This does not eliminate the tax liability. Instead, the IRS temporarily suspends active collection because requiring payment would create financial hardship.
Penalties and interest generally continue to accrue, and the IRS may periodically review the taxpayer’s financial situation. However, CNC status can provide important relief for taxpayers who genuinely lack the financial ability to make payments.
6. Can IRS Penalties Be Reduced or Removed?
A significant portion of an outstanding IRS balance can sometimes consist of penalties.
Depending upon the taxpayer’s history and circumstances, penalty abatement may be available.
Possible grounds for penalty relief can include qualifying for First Time Abatement or establishing reasonable cause for the failure to file or pay timely.
Removing penalties can sometimes substantially reduce the overall balance, particularly when significant penalties have accumulated over several tax periods.
7. What Happens If You Ignore IRS Tax Debt?
Ignoring an IRS collection problem is rarely a good strategy.
If a tax liability remains unresolved, the IRS has significant collection powers. Depending upon the circumstances and the procedural stage of the case, collection action can include:
- Filing a Notice of Federal Tax Lien
- Levying bank accounts
- Garnishing wages
- Seizing certain assets
- Applying future federal tax refunds to the outstanding debt
The IRS generally has a limited statutory period to collect an assessed tax liability, commonly ten years from the date of assessment. However, certain events can suspend or extend that collection period.
Understanding the applicable Collection Statute Expiration Date (CSED) can therefore be an important part of developing a tax-resolution strategy.
8. Which IRS Tax Resolution Option Is Best?
There is no single IRS resolution program that is best for everyone.
For one taxpayer, the best solution may be a straightforward installment agreement. For another, it may be a Partial Payment Installment Agreement, Currently Not Collectible status, penalty abatement, or an Offer in Compromise.
The appropriate strategy depends upon factors including:
- The amount of tax owed
- The years involved
- The applicable collection statutes
- Household income
- Necessary living expenses
- Real estate equity
- Retirement and investment accounts
- Business assets
- Future earning potential
- Prior IRS payment arrangements
- Whether all required tax returns have been filed
- Whether the IRS has already begun enforced collection
This is why tax resolution should generally begin with a careful review of the taxpayer’s IRS account and financial circumstances rather than immediately applying for a particular program.
Indiana Taxpayers Facing IRS Collection Problems
If you owe substantial federal taxes and cannot afford to pay the IRS in full, there may be several ways to resolve the problem.
At the Law Offices of Eric C. Keuling, LLC, I represent individuals and businesses in Carmel, Indianapolis, and throughout Indiana in IRS tax collection and tax-resolution matters.
My representation includes matters involving IRS installment agreements, Offers in Compromise, Partial Payment Installment Agreements, Currently Not Collectible status, penalty abatement, federal tax liens and levies, and other IRS collection issues.
If you have received an IRS collection notice or owe federal taxes that you cannot afford to pay in full, obtaining advice before agreeing to a payment arrangement can help you understand the available options and determine which resolution strategy is appropriate for your circumstances.
This article is provided for general informational purposes only and does not constitute legal or tax advice. Every tax matter depends upon its particular facts and circumstances.