There are several strategies to consider when it comes to dealing with IRS debt. The Offer-in-Compromise is an option for taxpayers who are simply not in a financial position to pay their IRS debt in full. The IRS will accept less than full pay, but the process of getting that agreement is not easy. But, contrary to the ads on TV, most of the offers are rejected by the government. In fact, only 14,000 out of 45,000 offers were accepted in 2020 as per the IRS’s latest data book.
You must be able to prove that your financial situation is such that you are not likely to be able to full-pay the debt.
All your tax returns due in the last 6 years must have been filed.
Your estimated tax payments and withholding for the current year must be adequate to cover your current year’s tax liability. The IRS will not make an agreement if you are still digging the hole deeper.
The offer amount must be adequate. The IRS uses a formula called the “Reasonable Collection Potential” to determine what they will accept.
Your offer must include a payment equal to 20% of the offer amount if you are offering a lump sum payment agreement.
Should the IRS reject your offer, the tax payments will not be returned.
Should the IRS accept your offer, you must stay in compliance for a period of five years. Failure to do this, by say not filing on time or making estimated tax payments, results in the Offer being void. And, no, the IRS will not be returning any tax payments made.
The 10-year Statute of Limitations is put on hold while the IRS is considering your offer.
The fact that most offers are rejected is undoubtedly the result of people making offers without understanding the process or the Reasonable Collection Potential formula. This is not helped by the TV ads promising ‘pennies on the dollar’ results without mentioning that you must prove your financial position.
I have been writing about the statute of limitations as they relate to non-filers. But there are other special circumstances in that Congress and the Courts have developed rules that affect the statute of limitations regarding refunds. Here are a few pointers to think about:
Not all payments are classified as tax payments. Sometimes people will pay the IRS a deposit to stop interest charges from accruing. Refunds of deposit money do not come under the statute of limitations.
Previously I detailed that there was a statute of limitations on when you could file a claim for refund and get credit for any overpayments. That limit is 3 years from the due date or 2 years from the date of payment whichever is later. There are exceptions to this law and one of those is for medical reasons.
Sometimes it’s not laziness that produces a non-filer situation. Medical problems can also result in non-filer status. Congress carved out an exception for this in the tax code and the IRS issued Rev. Proc. 99-21 to cover this situation. The statute of limitations is suspended when the taxpayer is determined to have a mental or physical impairment that can be expected to result in their death or last for a period of at least 12 months.
There are two major requirements to use this exception:
No person was authorized to act on behalf of the taxpayer, including their spouse, during the disability period, and
There must be a written statement from a qualified physician as to the disability. This statement must be detailed and specifically state that the taxpayer was prevented from managing his or her affairs.
There are lots of ways to get the physician’s statement wrong, so pay attention to Rev. Proc. 99-21 if you are going to use this exception.
Lots of Non-Filers are not out to rip off the IRS. They figure they have a refund, so the due date is not important to them. After all, the penalties for late filing are all based on the amount owed to the IRS. Late filing turns into a habit and many times that delay turns into years.
Here is the catch. You only have three years from the due date of the return to file and claim your refund. Once the three years are up, too bad. I know of cases where this has happened to the tune of tens of thousands of dollars. Many times, somebody will have a big year and find out they owe, but it is too late to use the prior year’s refunds to offset that liability.
Unless your intention is to make a voluntary contribution to the US Treasury, file the return. The IRS does not have the power to fix this, once the three years are gone.
The IRS has 10 years to collect on a tax debt. This time period starts on the date of assessment, that is the date they post it to their database. It would seem to be a simple manner to figure out when the 10 years is up, but this is taxes after all. The complexity comes from events that can put a hold on the statute days from running.
These holds are the result of events happening that prevent the IRS from taking collection actions such as seizing a tax debtor’s bank account. This is only fair since it is conceivable that people would take advantage of the IRS’s processes to constantly initiate requests for a payment plan with the sole intention of running the clock on the IRS.
What are the events that will prevent the IRS from taking collection actions?
Filing bankruptcy is a big one. The entire time that the bankruptcy estate is open plus the following 6 months is added to the Statute of Limitations date.
Requesting a payment plan is another. The number of days that the IRS is considering whether to accept or reject is added to the 10-year date. If they decide to reject, an additional 30 days is added.
Similarly, the days that an Offer-in-Compromise is under consideration places a hold Statute of Limitations from running.
Now we come to the problem.
The IRS is very poor in updating its database when an Offer-in-Compromise or Payment Plan request is either accepted or rejected. Instead of seeing statute of limitations dates calculated as maybe a 9-month extension, you find them to be years long. Whether this is by design or just typical bureaucracy inefficiency is hard to say with certainty. My guess is that they are aware that maybe half the dates are wrong, but this error works to their benefit and as result is not a high priority to fix.
Bottom line, if your strategy is to wait out the Statute of Limitations, you had better plan on doing some work to prove what that date should be.