The Tax Resolution Industry tries create the impression that most people “settle” their debt with the IRS and that it can help you do it.
The truth is unfortunately different than they would have you believe for a few reasons:
- The debt settlement process with the IRS isn't informal. In other words, it doesn't work like settling a credit card debt by offering some random amount based on what funds you've been able to gather.
- The resolution expert doesn't have a secret relationship with the Settlement Department that is going to give you a magical leg up.
- The vast majority of people with tax debt don't “qualify” to settle tax debt using the formal, formula-based offer in compromise program that is required to “settle” debt.
- Most people with tax debt end up in some sort of Installment Agreement with the IRS, Non-Collectible Status, or in a Bankruptcy proceeding at some point.
The most common types of payment plan arrangements entered into with the IRS are as follows:
Guaranteed Installment Agreements
If you owe less than $10,000.00 and can afford to pay it within 3 years or less, the law provides that you are entitled to a payment plan (I.R.C. Section 6159(c)). This can be done without any help. Visit the IRS website at https://www.irs.gov/payments/online-payment-agreement-application
Streamlined Installment Agreements – 50K
The IRS has decided on it's own to expand the Guaranteed Installment Agreement Law and apply it to people who have $50,000.00 or less in tax debt. This arrangement allow you to avoid proving your financial situation to the IRS and it requires that the debt be paid within 72 months or within the remaining time on the collection statute whichever is shorter.
If you agree to allow the payments to be auto-debited from your bank account, and the IRS hasn't already recorded an IRS Lien Notice, it's internal policy is that it won't record the lien notice as a result of the Agreement. Again…you don't need help to do this if you think you can afford to pay in full over the 72 month period. Call the IRS or visit this website. https://www.irs.gov/payments/online-payment-agreement-application
If the debt is below $25,000.00 when the payment plan is arranged, you can pay it within 60 months or the remaining statute period, whichever is shorter, and payments are auto deducted, the IRS will withdraw any tax liens after 3 months of payments on request.
Streamlined Installment Agreements – 100k
The IRS has recently expanded it's streamlined program to include those who owe more than $50,000.00 but less than $100,000.00. Again, this is great for those who can afford it and don't want to have to provide the IRS a breakdown of their assets, income, budget etc. Not only can you stretch out the payment without showing financials under this type of agreement but instead of 72 months, you will have 84 months or 7 full years to pay it in full.
There are a few downsides to this extended, streamlined agreement:
- A Federal Notice of Tax Lien will be filed for any debt you owe.
- You have to pay the debt back in less than 84 months if the Collection Statute Expiration Date (CSED) has less than 84 months remaining on it.
- If the case has been assigned to a local IRS Revenue Officer, the Officer will collect a financial statement and use that to determine how you are going to deal with the debt, ie. you may not be able to use this option.
- A direct debit or payroll deduction is required to avoid use of financial statement.
We think that you can arrange this on your own as well… if you are certain you can afford it, and the case hasn't been assigned to a revenue officer. https://www.irs.gov/payments/online-payment-agreement-application
Discretionary Installment Agreements
If you owe the IRS more than $100,000.00, or if you owe the IRS more than $50,000 and less than $100,000.00 but you aren't able to pay the debt within 84 months (or the revenue officer is involved), or if you owe less than $50,000.00 and aren't able to pay the IRS debt within 72 months, you are going to have to provide financials and argue for a payment plan based on it's discretion. The financial statement is invasive and signed under penalty of perjury and a lot of back up documentation is going to be involved. Attorney involvement is usually necessary here because how your information is presented and documented and how your situation lines up in relation to the rules can be complicated.
Partial Pay Installment Agreements
A partial pay agreement is really just a type of Discretionary Installment Agreement wherein the IRS agrees to monthly payments that will total less than the balance due over the remaining time left on the Collection Statute of Limitations. This type of arrangement is discretionary and the rules require that you fully disclose your financial situation and back up documents. Doing these correctly usually requires the help of experienced counsel. The IRS will record a lien notice for any year owed.
The big upside to this type of arrangement is that it can act as a quasi-offer in compromise in the sense that if you convince the IRS to take less per month than what's necessary to pay the debt before the statute of limitations on collections runs out…you've in essence settled the debt for less than what is owed. The difficult part is staying on the agreement until that date as the IRS will check your income, budget, and assets every few years, anytime your income changes, your miss a payment, fail to file a return when due, or fail to pay any new tax debt when due.
Full Pay Plans – Based on Actual Financials
When the IRS is forcing you to use your actual financials to arrange a payment… it is not always going to allow you to use your actual household budget to determine how much you can afford to pay. This is very important to understand when trying to compare how an installment agreement would look if based on time…(see above) vs. arguing for a Discretionary Installment Agreement.
For instance, if you have a $1000.00 per month minimum credit card payment requirement and your car payment is $800.00 per month, the IRS will not initially allow you to use the $1000.00 credit card payment as a budget item or the full amount of your car payment unless you are able to pay the tax debt within a certain period of time. If it cuts the car payment to the IRS standard, it would see an additional $1300.00 between the two as excess money to pay toward your tax debt.
But…you may be able to convince the IRS to give you a period of time to continue to use your actual budget that includes these items…or to give you your actual budget for a period of time that allows you pay the difference between your net income and budget and pay the tax debt in full.
This can be done in order to give you time to change the car payment, get rid of the consumer debt or otherwise deal with the problem so that your budget more closely resembles the standard budget the IRS want's to allow you to use.
This type of agreement ends up creating a stair-stepped plan where the payment is a certain amount for a period of time and then it is raised.
This agreement likely requires professional help. The IRS will record a lien notice for any year owed.
We include IRS Non-Collectible Status under the IRS Payment Arrangement Category because it is negotiated just like a partial pay installment agreement with financial statements and proof.
The only difference is that the proof will show the IRS that after allowing for the IRS' standardized budget….your have zero ability to pay. If this is accomplished, the IRS will freeze your account and won't collect for at least one year while it waits to see if your situation improves. The Collection Statute time period will continue to run while in Non-Collectible Status but the IRS will record a Notice of Federal Tax Lien.
Bankruptcy vs. Installment Agreements
Large IRS payment plans coupled with other debt problems usually create an untenable situation.
Most people end up giving up the payment of one or the other, because the payment amount on the credit card debt hasn't been included in the budget when the payment plan is negotiated.
When there are tax and other debt problems and the situation is causing some real distress…bankruptcy needs to be considered.
It may be possible to eliminate all the tax and other debt, or at least use the tax debt to remove the other debt making it easier to move forward.
Michael S. Anderson, Attorney 2158 N. Gilbert Rd. Ste 101 Mesa, Arizona 85203
Phone: (480) 507-5985 Fax: (480) 507-5988 Email: [email protected] Website: www.taxlawyeraz.com