How Do I Determine Which IRS Debt Resolution Option Is Best Given My Circumstances?
Aug. 13, 2020
First Step - Understanding how It Really Works
Many taxpayers have the mistaken impression that making a "deal" with the IRS is an informal process. Unfortunately, it's just the opposite. It's a process governed by a number of laws and rules and also by how those laws/rules apply to the taxpayer's situation. Once this is understood, it's easier to understand why the second step is necessary.
Second Step - Understanding Options
The law provides a number of ways to deal with an IRS debt
Everyone with an IRS debt would like it to be forgiven of course. The primary method that taxpayers believe this occurs is via the IRS offer in compromise process (OIC).
The OIC allows the taxpayer to pay less than what's owed if certain conditions are met. The first condition is proving to the IRS that the taxpayer can't afford to pay the debt over the time remaining on the collection statute expiration date. The collection statute expiration date is the time the IRS has left to collect. Most people with tax debt can't get past this first condition. Of those that can, many can't pay the offer amount that's calculated using a formula.
Fortunately, the law provides other ways to reduce IRS debt.
The most common methods used are the "partial-pay" installment agreement and "non-collectible status". Both options require the taxpayer to prove to the IRS, that he or she can't afford to make a monthly payment large enough to pay the debt in full before the CSED runs. The amount available to pay may be as low as zero. At zero, the taxpayer qualifies for non-collectible status. These two options aren't the same as an offer in compromise, because the taxpayer may have assets the IRS isn't interested in that may be countable in an OIC, and/or the taxpayer's income situation may go up in the future and the IRS is aware that it may do so.
Other common options used to reduce the debt include bankruptcy, penalty abatement and offers in compromise based on "equity".
If the debt is incorrectly calculated, there are legal methods available to challenge it.
Third Step - Apply Facts to The Law (analysis)
There are a number of "facts" that have to be reviewed and applied to the law/rules in order to properly determine the best IRS debt option. The most important are:
The amount of the IRS debt
Whether the debt is correct
Whether it can be challenged
Where the debt is in the IRS' collection process
The taxpayer's income, budget and asset situation
The taxpayer's "other debt" situation
The collection statute expiration date
Whether there are missing returns
Whether there will be more debt as result of the missing returns
Whether it's important to avoid an IRS lien notice
All of the above and more play a role in determining which option to use. And...sometimes what may be a best option today, may not be a best option down the road. Facts and circumstances change as do laws and IRS rules.
Because many taxpayers misunderstand the process and don't undertake proper analysis before approaching the IRS, they often end up agreeing to something that doesn't make sense given their situation. This can make the situation more difficult for the taxpayer.
Mr. Henry owed the IRS $45,000.00 related to several missing tax returns. He filed the returns, received the bill and immediately called the IRS and arranged an installment agreement to pay the debt in full over several years. The payment was difficult for him to make and the IRS recorded a lien notice which caused him problems when he tried to re-finance his mortgage a short time later. The payment and the lien issue became difficult and he sought help. He learned after the analysis was complete that:
a. He could have arranged a full pay installment agreement in way that would have avoided the IRS lien notice filing.
b. If he increased his health insurance coverage that he needed to do anyway and set up a payment plan on his federally guaranteed student loans, he would qualify for an offer in compromise, or at least a much smaller partial pay installment agreement amount.
c. That he could use chapter 7 bankruptcy to eliminate his large credit card debts that weren't factored into his IRS payment plan making it easier for him to make the full pay installment agreement amount each month.
Ms. Fried had been struggling with a large/old IRS debt for a long time. In and out of payment plans, non-collectible status arrangements and a long period of IRS neglect during which the IRS didn't contact her or try to collect the debt. Her income remained steady and with 2 years remaining on the CSED the IRS contacted her again. On paper she qualified for an IRS offer in compromise and the amount necessary to settle the debt would have been several hundred dollars over a 24 month period.
She had her situation reviewed by one professional who offered to help her with the offer in compromise for a reasonable fee. She got a second opinion from another who agreed an offer in compromise should work but pointed out that the offer process take several months, that it stopped the CSED "clock" and that she would likely be able to arrange a monthly payment a bit lower than the Offer in Compromise payment by setting up a partial pay installment agreement.
She chose to arrange the partial pay installment agreement. Not necessarily because the payment was lower but because the CSED only had 24 months on it and the payment plan, once arranged, wouldn't stop the CSED clock. When the clock ran her large IRS debt was removed and her IRS liens released.