The previous posts talked about the strategies of making an offer-in-compromise and payment agreements. These strategies work for people who can either fully or partially pay their IRS debt. But what about people whose financial picture is so bleak that they cannot make any payments? Are they doomed to forever harassment by government agents?
The answer is no, all is not lost. The government does not want to waste their resources chasing people who cannot pay when they have lots of cases for big bucks in inventory just waiting to get worked. The catch here is that you must prove to them that you are in the first group and not the second.
The way this works is that you must provide information about your equity in things you own and your cash flow. The IRS will review this information to verify that it is adequate and correct. The numbers are then plugged into a formula known as the “Reasonable Collection Potential”. If the result shows that you have no excess cash to contribute to the Treasury, the IRS changes your status to Currently Not Collectable and you get a pass from collection actions for approximately 2 years.
Besides getting the IRS off your back for 2 years or more, there is another huge benefit of proving your Currently Not Collectable status. The 10-year Statute of Limitations continues to run. Get across the 10-year line and the debt is no longer collectable by the IRS.
There are several strategies to consider when it comes to dealing with IRS debt. Making an online Payment Agreement to full-pay the debt over time is the easiest way to get the IRS off your back.
Online Payment Plan Basics
- Individuals, including sole practitioners and independent contractors, have two choices.
- Long-term payment plan – total tax, penalties, and interest is $50,000 or less.
- Short-term payment plan – total tax, penalties, and interest is $100,000 or less and can be paid in 180 days or less
- Business Payment Plan comes in only one flavor – the total liability must be $25,000 or less.
- The wonderful thing about these plans is that you do not have to submit financial information.
- Approval or disapproval will be almost instantaneous.
- Go to https://www.irs.gov/payments/online-payment-agreement-application
Paper Payment Plan Basics
- These plans are a lot harder. You must submit financial information about assets that you own and your cash flow so that the IRS can determine what they think your monthly payments should be.
- The IRS will suspend counting days on the 10-year Statute of Limitations while they consider the request. This process will probably add a minimum of six months to your time in purgatory.
- The IRS will reluctantly accept payment plan requests that are less than full-pay provided your financial information supports the lower payment.
The Good and Bad of Payment Plans
- IRS will suspend collection activities if the plan is approved.
- A majority of payment agreements end up in default. The more plans that you default, the harder it gets to make future deals. The golden rule here is to call them if you can’t make your payments. Do not wait for them to call you.
Payment Agreements are great if you can afford to make payments. My next post will be about what to do when you cannot afford to pay anything.
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.
Step Number 1 for developing a strategy to deal with IRS debt is to do a financial analysis of the client to determine what your options are. This involves the client’s information on what they own and their future cash. The results are fed into the same formulas that the IRS uses to determine the ability to pay.
Step Number 2 is to consider which is the optimal strategy based on the ability to pay results. These strategies can be thought of as follows:
- Make an offer to the IRS to settle the debt for less than the total owed.
- Make a payment plan that the client can live with.
- Get the IRS to back off by showing that the client is simply not in a position to make payments.
- Attempt to get the original assessment modified because of errors.
- File an Innocent or Injured Spouse claim.
- If this is a problem of errors on the IRS side, file a Form 911 with the Taxpayer Advocate Service to push them to correct the records.
- If this is a business owner, develop a new business plan to improve profitability and cash flow to the client so that they can pay the debt.
Additionally, there is the possibility of filing bankruptcy and having some of the assessments washed out by the bankruptcy court. This requires an attorney that specializes in bankruptcy.
My next 7 posts will discuss each of these strategies in more detail.