- 7 min read
- Review the five main approaches for resolving tax debt problems.
- Consider hiring a tax professional, if you owe more than $10,000 or are threatened with a levy.
Learn the Five Resolution Strategies for Tax Debts
Do you owe the IRS? Are you struggling with IRS tax 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 tax debts. If you want to get IRS debt help, it's important to understand the different IRS tax debt strategies.
There are five strategies for getting out of IRS tax debt.
- Offer in Compromise: a program where you can settle your tax debts for less than what you owe, if you can prove to the IRS that you can't afford to pay the debt. Requires making a lump sum for tax debts or short term payment plan to pay off the IRS at a reduced dollar amount.
- Installment agreement: a monthly payment plan for paying off your tax debts to the IRS.
- Partial payment installment agreement: a special type of long term payment plan to pay off your tax debts, where the total of all your monthly payments never pays off your entire tax debt. The unpaid portion expires, once the collections statutory expiration date is reached.
- Not currently collectible: a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so, if you can prove that you cannot afford to make a monthly payment or easily liquidate an asset..
- Filing bankruptcy: discharge your tax debts under the strict rules of a Chapter 7 or include them in a Chapter 13 bankruptcy petition.
Offer in Compromise for Tax Debts
Many people who find themselves in tax debt might focus on the first option above, which is called the Offer in Compromise (OIC), because it reduces a tax debt. If you qualify for and OIC, it is the best solution, but not everyone qualifies for the Offer in Compromise tax solution. Only about 15% of applicants succeed in reducing their tax 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.
An experienced tax professional will not only be able to determine if you are eligible to reduce your tax debt via an OIC, but they will also assist you in navigating the complicated IRS bureaucracy. 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 the compromise application. Through an Offer in Compromise, taxpayers agree to pay the IRS only the reasonable collection potential, instead of the full amount of tax debts owed. For some people the "reasonable collection potential" will be far less than the full amount of tax debts owed, sometimes as little as fractional percentage. Hard as it may be to believe, because the IRS collects only what it determines the taxpayer can afford, a person with both a monthly short-fall on basic monthly expenses (as the IRS defines it) and no valuable assets can settle a tax debt of any size for as little as $100.
Installment Agreement for Tax Debts
Many taxpayers cannot qualify for an Offer in Compromise or be able to include their tax debt in a bankruptcy relief, but still seek resolution for their IRS tax liability. In these cases, it may be possible to negotiate long term IRS payment arrangements for your tax debt. The IRS allows structuring five primary types of payment plans for tax debts, 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 size of the monthly payment depends on both the size of the tax debt and what the IRS determines you can afford, after analyzing your income, living expenses, and assets.
Currently Not Collectible Status and Tax Debts
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 for tax debts. If a client is placed in CNC status, the statute of limitations continues to run and the IRS agrees to temporarily forgo any tax collection actions. However, if a taxpayer’s financial status improves, the IRS can remove the file from CNC status and return to active tax collection status. The IRS can compel a person to liquidate certain assets, before granting CNC status.
Three Reasons for Attempting CNC Status:
- Taxpayer has income below allowable expenses and there is no indication that the financial situation will improve in the future;
- 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,
- Taxpayer has more allowable expenses than income and the statute of limitations is getting close to expiring.
Statute of Limitation for Tax Debt
The IRS has 10 years to collect outstanding tax liabilities. Each tax year is viewed separately. The 10 year clock on a tax debt starts 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 a tax audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount of the tax debt, 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.
Certain actions, such as filing for bankruptcy or submitting an Offer in Compromise put a temporary hold on the statutory clock. Because the IRS cannot collect on a tax debt during either of those events, the 10 year clock is stopped, until the OIC is accepted or rejected or until a bankruptcy case has been discharged.
Selecting a Tax Professional to Handle Your IRS Tax Debts
Because of the complexity of the Offer in Compromise and other tax debt processes, many taxpayers hire a tax professional to prepare their IRS documentation and to negotiate directly with the IRS. Tax professionals charge anywhere from $1,500 to $6,000 or more for accurate and thorough IRS representation. Because most of the tax debt solutions involve negotiating with the IRS, your tax professional should be admitted to practice before the IRS.
You should look for a Tax Attorney, an Enrolled Agent (EA), or a Certified Public Accountant (CPA) to handle your Offer in Compromise. The tax professional must know about the laws governing IRS collection of tax debts, how the IRS evaluates offers, 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.
Please be aware that even the most successful tax professionals have lost Offer in Compromise cases, so not every consumer looking for help with the IRS is guaranteed the most savings. It is important to know that your Offer in Compromise will be decided based on your unique financial situation. If you do need IRS help, having a tax professional represent you before the IRS will help ensure that all letters and phone calls from the IRS are handled quickly and professionally. But in the end, it is up to the IRS to make a decision about your tax debts. It is important to know that like death and taxes, your tax debt issue will not simply vanish, so you should seek help before the IRS escalates tax collection efforts and/or you accrue additional penalties and interest.
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 which tax representation firm is best for your needs.