IRS Options for Tax Liabilities

Taxpayers get bills for tax, penalties and/or interest that result from (a) filing a return with a balance due and not paying it at the time,  (b) going through an audit (correspondence, office or field) or (c) the result of a document matching process at the Service Center (forgetting to include income such as interest, dividends, capital gain, etc).

So, you get a bill from the IRS.  What are your options?  Here is an executive summary.

(a) You write them a check (or make a payment, including by credit  or debit card for the full amount through the IRS website (www.irs.gov).

(b) You arrange to get into an installment agreement (payment plan) where you will pay off the amount you owe generally within 72 months.  If the amount you owe is LESS than $50,000, the process can usually be accomplished through the IRS website.  If you owe $50,000 or more, then you will need to go through a more tedious process that involves completing an IRS financial statement (Form 433-A or 433-F) and submit back-up documentation (such as earnings statements, bank statements, etc).  Depending upon the circumstances, the IRS MAY file a Federal Tax Lien if the amount owed is greater than $25,000.

(c) You set up a partial pay installment agreement (where your payments are based upon what you can afford, but in an amount that will not pay off the tax, penalties and interest within the typical 10-year period the IRS has to collect the taxes).  These are more difficult to negotiate and will require the IRS to periodically review the plan (typically annually or bi-annually) to see if your payments can be increased.

(d) You negotiate an Offer in Compromise (OIC for short).  This is a pretty intensive process wherein your propose to resolve your total liability (for all tax years) by a lump-sum (or short-term payments) of an amount that is LESS than what you owe. The OIC process (with the IRS anyway – not necessarily so with State agencies) is pretty objective.  If you meet the requirements, then you most likely will be approved.  On my website under Technical Issues, I have an extensive discussion about the OIC process.  Read more about it there.  Basically, to qualify, you must prove that there is no way you can resolve your outstanding liabilities (including future accrual of penalties and interest) within the 10-year CSED (collection statute expiration date).  There is one special type of OIC referred to as “Effective Tax Administration.”  Typically, this is a hardship-based OIC that is reserved for taxpayers who have serious medical issues (often terminal or life altering) that requires they retain their assets for future medical needs to prolong their life.

(e) You are granted a status of Currently Not Collectible (CNC for short).  This process requires submission of a financial statement (433-A or 433-F) along with supporting documentation that establishes that you can only barely meet your basic living expenses, and currently, you have no ability to be making payments on your liability.  Your account will be reviewed (either annually or bi-annually) to see if your financial situation has improved and you can begin making payments.  Typically, this status is applicable to taxpayers who have lost their job, had a reduction in pay, or have had some challenging  event in their life (like a medical emergency) that makes it impossible to pay anything at the current time.

The opportunity to pay your liability by means of an installment agreement, an OIC or for being given a temporary hold on collection (referred to as CNC status) is based upon your current expenses.  The IRS has published COLLECTION FINANCIAL STANDARDS that establish maximums they will allow for (a) living expenses, (b) housing expenses, and (c) transportation expenses in computing a payment or minimum offer amount.  They have also determined an allowance for out-of-pocket medical expenses (in the absence of documenting a larger expenditure).  I will be addressing these standards in a subsequent post.  In the meantime, you can Google IRS COLLECTION FINANCIAL STANDARDS and read more about them on the Web.

For any of the options above (other than making full payment or being granted an OIC), you need to remember that your liability will continue to accrue interest (at the current rate of 4% a year) and a late payment penalty (6% a year for the first 48 months following the original due date for the return).

There is one other important point.  The IRS will NOT entertain any payment option (other than full payment) if the taxpayer is not current with (a) filing of returns (at least for the past 6 years), and (b) for the current year – is having sufficient tax withheld from their wages or is making estimated tax payments (self-employed taxpayers almost always are required to make these).  Make sure your W-4 that you give your employer lists ONLY the exemptions and filing status you are eligible to claim.  If your W-4 is inaccurate and the IRS finds out about it, the Agency MAY direct your employer to withhold at the SINGLE-NO EXEMPTION rate.

The above is intended to give you an overview of options that are available in resolving your IRS liability.  All of these are discussed in more depth on my website (www.dicknorton.com).   Many State agencies have similar payment option programs they offer to delinquent taxpayers (those who have outstanding liabilities).

 

 

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