Information about IRS Debt and Tax Lien

Information about IRS Debt and Tax Lien

Can we lose our home because of IRS tax debt?

We have a $250,000+ IRS tax lien from my spouse's previous business. We own a house and live paycheck-to-paycheck. Should we allow our house to go into foreclosure to get caught up on our debt, then try to buy again in a few years? We do not know how to handle the huge amount we owe the IRS.

Do not despair, you are not alone. Many Americans owe back taxes, or cannot afford to pay their IRS debts. If you need help with your IRS debt, it is important to understand you have options for resolving your IRS tax debt.

Before I discuss the strategies, I want you to know you can get no-cost, on-line quotes from pre-screened service providers who offer IRS debt resolution.

Five strategies for resolving IRS tax debt

The Internal Revenue Service offers several collection and payment alternatives for taxpayers who cannot pay the taxes they immediately. The hyperlinks immediately below connect to more information at the IRS about each program.

1. Offer in Compromise: a program where you can settle your tax debts for less than what you owe. Requires making a lump sum or short term payment plan to pay off the IRS at a reduced dollar amount. (See also "Topic 204 - Offers In Compromise.")

2. Installment agreement: a monthly payment plan for paying off the IRS. (See also "Topic 202 - Tax Payment Options.")

3. Partial payment installment agreement: a somewhat new debt management program where you have a long term payment plan to pay off the IRS at a reduced dollar amount.

4. Currently not collectible: a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so. (See also "Topic 201 - The Collection Process.")

5. Filing bankruptcy: discharge your tax debts under the strict rules of a Chapter 7 or 13 bankruptcy petition. (See also "Publication 908 - Main Content.")

Options compared

For taxpayers who cannot afford to pay off the entire debt through an installment agreement, the offer in compromise may be the best form of tax debt relief. The offer in compromise program is designed to help taxpayers who owe more than they can afford to pay. In some cases, the IRS will accept a reduced settlement that is based on the taxpayer's ability to pay off the debt. The reduced amount is a function of assets, income, and expenses.

Many people who find themselves in debt to the IRS might focus the Offer in Compromise ("OIC"). For those who qualify it can be the optimal solution, however, it is important to note that not everyone qualifies for the OIC solution.

Only about 15% of applicants succeed in reducing their debts through the OIC program. For this reason and because of the complexity of filing an OIC many people enlist the services of a tax professional who has a track record of success negotiating with the IRS. This Tax Professional will not only be able to determine if you are eligible to reduce your IRS debts via an OIC but they will also assist you in navigating the complicated IRS bureaucracy to achieve the desired outcome.

An OIC is a lengthy and time-consuming process. It takes most individuals anywhere from 12 months to 24 months to achieve a successful resolution on your offer application. Through an OIC, taxpayers agree to pay the IRS only the reasonable collection potential instead of the full amount of taxes owed. For some people the "reasonable collection potential" will be less than the full amount of taxes owed -- sometimes as little as 10%.

If a taxpayer does not qualify for an offer in compromise and cannot afford to pay an Installment Agreement, Currently not Collectible (CNC) status may be an option. If a client is placed in CNC status, the statute of limitations continues to run and the IRS will not pursue collection actions. However, if a taxpayerÂ’s financial status improves, the IRS can remove the file from CNC status and return to active collection status.

The reasons for attempting a CNC status include:

1. Taxpayer has income below allowable expenses and there is no indication that the financial situation will improve in the future;

2. Due to high equity, the taxpayer does not qualify for an OIC and has more allowable expenses than income so an Installment Agreement is not an option; and,

3. Taxpayer has more allowable expenses than income and the statute of limitations is getting close to expiring.

IRS and collections

The IRS has 10 years to collect outstanding tax liabilities. This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final.

From that day, the IRS has 10 years to collect the full amount, plus any penalties and interest. If the IRS does not collect the full amount in the 10-year period, then the remaining balance on the account disappears forever.

If you disagree with the amount of tax you owe

The IRS offers several means for taxpayers to dispute the amount of tax owed. See Publications and Forms About Your Appeal Rights to get started. The IRS also offers regional Taxpayer Assistance Centers for local, in-person assistance.

Strategy for dealing with multiple debts

If the IRS debt is larger than your other debts, deal with the IRS debt first. After resolving your IRS debt, then create a game-plan together for dealing with your other debts and your home.

Evaluate if you can qualify for a settlement on your IRS debt (and offer in compromise) and get that behind you, and then get back to solid financial footing and move forward. If your home payment is causing undue stress, then that is a consideration as well -- but deal with the IRS first.

If this seems overwhelming -- and I admit I provided a lot of information -- it cannot hurt to get no-cost, on-line quotes from pre-screened service providers who offer IRS debt resolution and will explain your options in detail, handle the negotiations and complete the IRS documentation for you.

I hope the information I have provided helps you Find. Learn. Save.




MMike Habib, Aug, 2010
Average taxpayers are not equipped with comprehensive knowledge about taxes so they will need third party tax help from an enrolled agent who is familiar with everything about taxation. Enrolled agents are authorized by the Department of Treasury to represent individuals or businesses when they need tax help regarding issues with the IRS.
BBob Kostos, Feb, 2011
Most taxpayers sadly can not afford professional help nowadays, especially if they have little or no assets and owe a few thousand dollars! What's to do in such a situation?
BBill Admin, Feb, 2011
The first thing a taxpayer needs to do, to avoid problems with the IRS, is to file all returns in a timely manner. That way, if there is a debt for one year, the IRS is open to a few possible solutions. If the person is not filed up-to-date, on the other hand, then even a small debt can have disastrous consequences, such as a wage garnishment or bank levy.

If the taxpayer owes a small debt and is filed up-to-date, the first option is to set up a monthly payment plan. In the IRS' own words:

"Your request for an installment agreement cannot be turned down if the tax you owe is not more than $10,000 and all three of the following apply.
  • During the past 5 tax years, you (and your spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax.
  • The IRS determines that you cannot pay the tax owed in full when it is due and you give the IRS any information needed to make that determination.
  • You agree to pay the full amount you owe within 3 years and to comply with the tax laws while the agreement is in effect.

The IRS charges a fee of $105 to set up a payment plan. The fee is reduced to $52 if you agree to make your monthly payments by electronic withdrawal. Also, there is a reduced fee of $43 available if your income is below a certain level.

The IRS states that "you will also be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full."

If the IRS accepts your request for a payment plan, then you must "agree to make your monthly payments on time.You also agree to meet all your future tax liabilities. This means that you must have enough withholding or estimated tax payments so that your tax liability for future years is paid in full when you timely file your return. Your request for an installment agreement will be denied if all required tax returns have not been filed. Any refund due you in a future year will be applied against the amount you owe. If your refund is applied to your balance, you are still required to make your regular monthly installment payment."

"If you do not make your payments on time or do not pay any balance due on a return you file later, you will be in default on your agreement and we may take enforcement actions, such as the filing of a Notice of Federal Tax Lien or an IRS levy action, to collect the entire amount you owe. To ensure that your payments are made timely, you should consider making them by electronic funds withdrawal."

You can request a payment plan by attaching the IRS Form 9465 to the front of your return. You can also submit the Form 9465 to the IRS by itself.

If you can't afford the monthly payment the IRS demands, you have to prove to the IRS' satisfaction that you are in a serious financial hardship that prevents you from making payment. To do this, you have to fill out a an IRS Form 433. (Note: the IRS has more than one version of the Form 433. The one in the link above is the one most commonly requested.) If you prove to the IRS that your household income does not cover your basic living expenses (as the IRS defines them) and you don't have liquid assets, they will status you as Currently Not Collectible (CNC). All collection efforts are put on hold, while you are in CNC, but the debt continues to grow with interest and penalty. CNC is a temporary status. The IRS will check back with you, to see if your finances have improved and you can afford to pay them.