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Mark Cappel
UpdatedApr 12, 2010
Key Takeaways:
  • Review the five main strategies for resolving federal tax debt.
  • Understand that the IRS has 10 years to collect outstanding tax liabilities.
  • Consult with a tax professional if you owe more than $10,000 or are threatened with a levy.

I have $12,000 in taxes I owe due to distributions from a 401(k). What are my options to resolve my IRS debt?

We are in the process of filing a Chapter 13 due to job losses for a year. We also owe the IRS $12,000 due to early withdrawal of 401(k) to live off of. We have been advised by our lawyer , to put the this debt in with other debt for a five-year plan we don't like the idea of a five-year plan for we have no choice because a three-year plan would be a lot more money. We both have recently that re-employed where income is a lot lower we both make 31,000 a year which is very difficult to pay the IRS on its own. We are currently in a noncollectible status a once we file our taxes and show we return to work . We will not be noncollectible. Should we approach the IRS on its own see if we could negotiate with no tax and abatement this debt is from 2007, 2008.

First and foremost, consult with your bankruptcy attorney about alternative plans you have regarding any of your debts. Your free-lancing on one aspect of your debt without your attorney's knowledge may affect a strategy he or she has for resolving another aspect of your debt.

Many Americans cannot afford to pay their IRS debts. If you want to get IRS debt help, it is important to understand the different IRS tax debt strategies. You mentioned you are in a currently non-collectible status, but will be collectible again soon.

If you want a free consultation, please visit the IRS tax debt relief savings center.

There are five strategies for getting out of IRS tax debt.

  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.
  2. Installment agreement: A monthly payment plan for paying off the IRS.
  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.
  5. Filing bankruptcy: Discharge your tax debts under the strict rules of a Chapter 7 or 13 bankruptcy petition.

Offer in Compromise

Many people who find themselves in debt to the IRS might focus on the an 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 offer in compromise 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 offer in compromise 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 offer in compromise, 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%.

Installment Agreement

Taxpayers with tax debts under $10,000 usually can manage the payment on their own or via an Installment Agreement or Partial Payment Installment Agreement arranged with the IRS. An installment agreement is a temporary delay in which the IRS waits to collect taxes due, but but still charges penalties and interest, and may put a lien on assets.

A partial payment installment agreement is a monthly payment plan for a portion of the tax debt.

Taxpayers can apply for an IRS installment agreement online.

Currently not Collectible

As you know, 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 taxpayer's financial status improves, the IRS can remove the file from CNC status and return to active collection status. Reasons for attempting 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.


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 this information helps you Find. Learn & Save.




TTaylor, Jul, 2012
My husband and I have been doing some research about a collections attorney for our aunt. She has been dealing with collections for the past year, and we would really like to help her out by hiring a collections attorney for her. Are there benefits to hiring a collections attorney? And are there any really good ones in the Colorado Springs area?
BBill, Jul, 2012
What are your aunt's goals? If you seek to help your aunt negotiate lump-sum settlements for her consumer debts, then consider hiring a debt settlement company. If the debts are not routine consumer debts, such as tax debt, then you may want to hire a company that specializes in that type of debt to assist your aunt.

If your aunt needs legal assistance, then you would serve her well by hiring a lawyer to advise her on Colorado's collection laws.