- 9 min read
- Review the 5 ways to resolve IRS tax debt.
- Offers in Compromise can settle IRS debt for a fraction of what you owe... if you qualify.
- Speak with a tax professional to fully understand your options for resolving your tax debt.
IRS Tax Debt Tips and Advice
Do you owe the IRS? Are you struggling with IRS debts and cannot figure out what to do? Don't despair, you are not alone. Many Americans owe back taxes, or cannot afford to pay their IRS debts. If you need IRS debt help, you can get it. In order to get the right kind of help, however, it's important for you to understand the different options available for resolving IRS tax debt problems.
There are five strategies for getting out of IRS tax debt.
- Offer in Compromise(OIC): a program where you can settle your tax debts for less than what you owe, if you can demonstrate a financial hardship that proves to the IRS that you cannot afford to repay the debt. An OIC requires making a lump sum or short term payment plan to pay off the IRS at a reduced dollar amount.
- Installment agreement: a monthly payment plan for paying off the IRS debt, along with interest and penalties that continue to accrue.
- Partial payment installment agreement (PPIA): a hybrid of a settlement and a payment plan. In a PPIA, the IRS agrees to accept a monthly payment that will never pay off the tax debt. You continue making the monthly payment until the IRS collection statute expires, when any remaining balance is wiped out.
- Currently not collectible (CNC): a program where the IRS voluntarily agrees to suspend all collection activities on the tax debt for a year or so. CNC status will be granted if you can prove a financial hardship which prevents you from making monthly payments.
- Filing bankruptcy: discharge your tax debts under the strict rules of a Chapter 7 or have your tax debt included in a payment plan as part of a Chapter 13 bankruptcy petition.
Offer in Compromise
Many people who find themselves in debt to the IRS might focus on the first option above - 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. In order to qualify for an OIC, you must be in a financial hardship that demonstrates to the IRS that you lack the ability to repay the debt within the remaining time the IRS has to collect on the debt. Your financial hardship is based on an examination of your household income, monthly allowable living expenses, and the assets in the taxpayer's name.
Less than 15% of OIC applications that are submitted by individuals are approved by the IRS. The success rate of competent tax professionals is much higher. This is due, in large part, to a professional not submitting a case that does not meet the OIC standards. A 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 so you achieve the desired outcome. An Offer in Compromise is a lengthy and time-consuming process. Most cases take over a year to move through the system. IRS rules require the IRS to decide within two years from the date of submission of the OIC. If the IRS does not finalize an answer within two years, your OIC is automatically accepted.
You may not qualify for an Offer in Compromise or be able to discharge you tax debt through filing for bankruptcy, but you still need to resolve your IRS liability. In this case, the best solution may be to negotiate a long term payment plan with the IRS. The IRS has different types of payment plans, or Installment Agreements: Guaranteed Installment Agreements, Streamlined Installment Agreements, In-Business Trust Fund Agreements, Long-Term Installment Agreements, and Installment Agreements on Specified Balance Due Accounts. The kind of installment agreement that you can obtain depends on the size of your tax debt, the type of tax you owe, your ability to pay, and the collection statutory expiration date (when the tax debt expires and no longer is a legally collectible debt). The IRS has 10 years to collect on a tax debt, from the date of the assessment, provided that you do not do anything to stop the 10-year clock from running, such as file for bankruptcy or submit an OIC.
Partial Payment Installment Agreement
Most installment agreements require you to pay the entire tax debt plus any interest and penalties. In a PPIA, the IRS agrees to accept a monthly payment that will never pay off the tax debt. The IRS prefers to put you into a plan that pays off the debt, so you must prove to the IRS that you lack the ability to make a large enough payment to pay the debt in full over time, in order to establish a PPIA. Before accepting a PPIA, the IRS also looks at your assets. If you have sizeable assets, the IRS will compel you to liquidate them and pay the tax debt. If the IRS agrees to accept a PPIA from you, then your payment continues each month until the tax debt expires due to the 10 year statute of limitations.
Currently Not Collectible
If you do not qualify for an offer in compromise and cannot afford to make payments in an Installment Agreement, Currently not Collectible (CNC) status may be an option. If a client is placed in CNC status, the IRS temporarily stops all attempts to collect the debt. During CNC, the clock on the statute of limitations continues to run. Once granted, your CNC status is reviewed periodically. If your financial status improves, the IRS can remove the file from CNC status and move it to active collection status.
Reasons for attempting CNC status:
- Your income is less than your allowable living expenses, but you have some valuable asset that makes an OIC unrealizable or too expensive for you to meet the settlement terms.
- The collection statute is getting close to running out and it makes more sense to get into CNC than to submit an OIC. Any time that you submit an OIC, the 10-year clock stops running.
Statute of Limitation for IRS Tax Debt
The IRS has 10 years to collect outstanding tax liabilities. This is measured from the day a tax liability is assessed. An assessment can take place in a number of ways. An assessment can come from a balance due on a tax return you filed, from returns that the IRS filed for you, from an IRS audit, or from a proposed assessment that has become final. From the day of the assessment, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever.
Some tax debt can be wiped out in bankruptcy Chapter 7. Income tax debt, for instance is eligible for inclusion in your bankruptcy, but payroll tax debt is not. AN IRS tax debt can be wiped out in Chapter 7 bankruptcy only if it meets three basic rules:
- Taxes must be due for at least three years. Due dates for income taxes are on April 15th of the year after the tax period, e.g., 2009 taxes were due on April 15th, 2010 and will not be eligible for inclusion in a bankruptcy until April 15th, 2013
- The tax returns must have been filed at least two years prior to the bankruptcy filing
- Your tax assessment must be in place for at least 240 days. Even if a tax debt meets the three years due and two years filed rule, it cannot be included in a discharge bankruptcy if the IRS has made a new assessment on it via an audit or change to your return.
Most tax debts can be included in a payment plan set up in Chapter 13 bankruptcy.
Any time that you are considering filing bankruptcy, consult with a competent, licensed attorney. If you have a tax debt, make sure to inform your attorney about it, so that it is included in your bankruptcy if it is eligible to be included.
Selecting a Tax Professional to handle your IRS Tax Debts
Working directly with the IRS is stressful and can be overwhelming. Because of the complexity of the Offer in Compromise and other IRS tax debt processes, as well as the harm that you can suffer if your tax problem is not dealt with effectively, you should consider hiring a tax professional. Your tax professional will prepare your IRS documentation and negotiate on your behalf directly with the IRS. Remember, if you speak with the IRS directly, the IRS is representing its interests, not yours.
Tax professionals charge anywhere from $1,500 to $6,000 or more for accurate and thorough IRS representation. Make sure to choose a representative that has the proper credentials to legally represent you before the IRS. The three types of professionals that are authorized to represent you are a Tax Attorney, an Enrolled Agent (EA), or a Certified Public Accountant (CPA). Your tax professional should know the laws governing IRS collection of tax debts, how the IRS evaluates Offers-in-Compromise, and what all the options are for resolving tax debt problems.
"Taxpayers should be looking for a tax professional with years of experience in IRS collection matters, especially experience in dealing with revenue officers, the Automated Collection Systems division, and the complex IRS process" according to Jim Brown, the managing tax attorney with Freedom Tax Relief. Be aware that even the most successful tax professionals have lost Offer in Compromise cases, so no result is guaranteed. It is important to know that your Offer in Compromise will be decided on the basis of your unique financial situation.
If you do need IRS debt help, having a tax professional represent you before the IRS will help ensure that all letters and phone calls from the IRS are professionally. Because a tax professional knows the rules and the extent of harm that the IRS can inflict, he or she will not be subject to intimidation and threats like you would be. Your tax professional also know what you are required to disclose to the IRS, whereas you do not. Your tax professional will prevent you from disclosing information to the IRS that can harm your case that you were not required to disclose.
If you have a tax debt, your IRS tax debt issue will not go away simply because you want it to. It is up to you to take the right steps in order to get the best possible solution in place. Make sure to seek help before the IRS escalates collection efforts, such as levying your wages or bank accounts. Speak with a qualified tax professional, to make sure that you know your options and to prevent the IRS from taking advantage of you.
Be sure to check out tax relief reviews of firms that offer IRS debt advisory services, including Freedom Tax Relief, Tax Masters and JK Harris among others. Do your homework to figure out what you owe, what your options are, and who the best tax representation firm is for your needs.