May 15, 2009

IRS Tax Debt and Collection: What Are My Options?

Just a refresher for all who want a concise summary of the options that are used most of the time to resolve tax debt and IRS collection issues.

Owing the IRS money can be overwhelming, especially with threats of liens and levies hanging over your head. You know you should take action and get your situation under control, but what can you do? You don’t have the money to pay the balance in full, but ignoring the IRS is not an option.

Fortunately, there are several resolution options available to tax payers, and the right one for you will depend upon your current financial situation. Please note that the options below do not argue the validity of the tax liability, but are agreements with the IRS to help resolve the tax debt you owe. Although full paying the liability is often the best option (and cheapest), most people are not able to acquire the funds necessary to do so. If you are one of these people, one of the following options might work for you.

*Installment Agreements
*Streamlined Installment Agreement
*Installment Agreement based on ability to pay
*Lifestyle Adjustment Installment Agreement
*Partial Pay Installment Agreement
*Currently Non-Collectible
*Offer in Compromise
*Other options

It is important to note that each of the agreements above will require past, present and future compliance. Generally, this means that you must file at least the past 6 years tax returns, the current year’s tax return, and you must file and pay all future years’ taxes. Failure to do so will cause you to default any agreement that you have with the IRS. Also, it is important to know that interest will continue to accrue until the balance is paid in full, but will accrue at a lesser rate once an agreement is set up.

Installment Agreements- Monthly Payment Plan

An installment agreement is the most common resolution used by taxpayers who owe money to the IRS but cannot afford to full pay. Basically, an installment agreement is a monthly payment plan to pay off the balance due. There are many different types of installment agreements as listed below.

Streamlined-Installment Agreement:

A streamlined installment agreement is a five-year payment plan for those who owe less than $25,000 to the IRS. In order to qualify for this type of agreement, the taxpayer must meet the following criteria:
*File all tax returns for the current year and at least the past 6 years
*Provide employer name, bank name, and date of birth to the IRS
*The collection statute does not expire within 5 years
*The assessed balance is below $25,000
*The taxpayer can afford the required monthly payment amount, which is equal
to the total liability divided by 50 months (Ex: $24,000/50= $480 per month).

Ability to Pay Installment Agreement

For taxpayers who cannot afford to pay the streamlined installment amount, the IRS will consider setting up an installment agreement based on the individual’s current financial situation or their “ability to pay”. The IRS will look at an individual’s monthly income and expenses to determine the amount of money left over each month. This “leftover” amount is known as monthly disposable income. Generally, the amount of monthly disposable income will be the amount of your monthly payment.

This type of agreement will require a completed and signed IRS Collection Information Statement, Form 433-A or Form 433-F (depending on your situation) and all accompanying documents. The IRS will use these documents to verify the monthly payment amount. Please note that the IRS will only allow necessary living expenses and the amounts allowed as necessary may be limited by local and national allowable living expense standards. In order to qualify for this agreement, the taxpayer must meet the following criteria:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received by the IRS timely each month
*Submit all requested IRS forms and financial documentation.
*The liability will be paid in full before the collection statute expires

Please note that the IRS will generally file a tax lien on you if you enter into an installment agreement on any ability to pay installment agreement. In some instances if your liability is below $25,000, the IRS will not file a tax lien. In any event, you should expect a tax lien on any ability to pay installment agreements.

Lifestyle Adjustment
Occasionally taxpayers might qualify for a specific resolution known as a Lifestyle Adjustment Installment agreement. Many taxpayers find that their necessary living expenses are above the local and national standards but are unable to pay the required amount due to other financial obligations, such as a high mortgage or car payment. The IRS will consider allowing the taxpayer to make monthly payments based on his/her actual expenses for 12-months to give the taxpayer time to adjust their lifestyle (ex: refinance a home or find a car with a lower car payment) to reduce their monthly expenses to the level of the local or national standards. Then, the monthly payment amount will increase to the amount of the monthly disposable income based on the local and national living expense standards. The requirements for this type of agreement are listed below:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received on time each month
*Submit all requested IRS forms and financial documentation
*The liability will be paid before the collection statute expires
*Pay a lower payment for one year and then increase payment amount

Please note that the IRS will generally file a tax lien on you if you enter into this type of installment agreement.

Partial Pay Installment Agreement

A partial pay installment agreement follows essentially the same process as a regular installment agreement but will not allow the taxpayer to pay the total liability over the life of the collection statute. For example, if you owe the IRS $50,000 and the collection statute is 36 months away and your monthly disposable income is $300, you will not have the chance to pay off the total liability before the collection statute expires (i.e. you will pay only 36 months @$300, or $10,800- a “partial” amount of your total liability before the liability expires due to statute).

This type of agreement is similar to an Offer in Compromise, but does not require a down payment nor does it extend the collection statute.

Please note that the IRS will review this type of agreement every two years to make sure that the taxpayer’s financial situation has not improved. The IRS will also file a lien if this agreement is accepted.

Requirements of a Partial Pay Installment Agreement:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received on time each month
*Submit all requested IRS forms and financial documentation
*The liability will be paid before the collection statute expires


Currently Non-Collectible (“CNC”)

If your current financial situation does not allow you to reasonably make monthly payments and you do not have any assets to borrow against and pay the liability in full, the IRS will place you into a currently non-collectible status. While you are in this status, you are not required to make monthly payments towards your tax liability and the IRS will stop most collection activity, such as levies. This type of agreement will require a completed and signed IRS Collection Information Statement, Form 433-A or Form 433-B and all accompanying documents to verify that you cannot afford to make monthly payments.

Also, this is a last resort for the IRS. Consequently they will want you to use any assets available to pay down your debt first. If you cannot afford to make monthly payments but do have equity in your home or an investment or retirement account, they will want you to use the available funds to pay your liability before considering placing you in CNC.

The IRS will file a lien and will review your situation every year to make sure your financial situation hasn’t improved.

CNC Qualifications & Requirements:
*Negative monthly disposable income after necessary living expenses are paid
*Satisfy to the IRS that you do not or have liquidated all assets to full or partially pay the liability
*File all tax returns for the current year and at least the past 6 years
*Submit all requested IRS forms and financial documentation.

Offer In Compromise- the “settlement”

Occasionally, the IRS may consider settling the debt for less than the actual amount owed. This agreement, known as an Offer in Compromise, is extremely difficult to achieve and has strict guidelines that must be met in order to be considered. The IRS will only accept an Offer in Compromise if they conclude that the taxpayer will never be able to pay the total amount of the tax liability over the life of the collection statute or if they determine that collecting the tax would be unfair or inequitable.

The IRS will look at your reasonable collection potential (“RCP standard”) to determine whether or not they would have the ability to collect the total amount of the tax over the life of the statute. If they determine that your reasonable collection potential is less than the total amount of the liability, the IRS may settle your tax debt. Your reasonable collection potential can be calculated by multiplying your monthly disposable income by months remaining on the collection statute of limitations. An Offer in Compromise (a short-term cash offer) is calculated by multiplying your MDI by 48 months and adding that number to the amount of the net equity you have in your assets. If this amount is less than the liability, this becomes your “offer amount.”

Example:

A taxpayer who owes $100,000 to the IRS and has $500 in a checking account and $30,000 net equity in their home. Their MDI is $55 per month. The Offer Amount would be (note that the client will meet the prerequisite RCP standard):

$500 + $30,000 + ($55*48) = $33,140

This will involve a full financial investigation of income, assets, and expenses and can take anywhere from 6 months to two years to be reviewed by the IRS.

The IRS will also take your age, health, education and employment history into consideration. If you're 80 years old, for example, and are living on a fixed income and cannot afford payments to absolve the debt, the IRS may consider settling your debt as you do not have the means to pay the amount over the life of the collection statute. If you're 30 with a career ahead of you, it's presumable that in the coming years your financial situation may improve and your reasonable collection potential will increase. The IRS will generally not accept an Offer in Compromise if they believe you will have the ability to pay in the future.

OIC Qualifications & Requirements:
1. Satisfy to the IRS that you do not have equity in assets to pay the liability in full
2. Ensure that your Offer in Compromise meets the Reasonable Collection
Potential Standard
3. Establish that you have not dissolved or dissipated any assets that could have been used to pay the tax (the “dissolution period” starts when your tax is assessed or should be been assessed, whichever is earlier)
4. File current year’s tax return and all past due returns
5. File timely and pay all taxes for the next 5 years
6. Agree to give your tax refund for the current year to the IRS
7. Complete IRS form 656, 433-A, and submit to IRS will all attachments

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