Most individual taxpayers use one of four options that provide the ability to pay the debt in full over time and stop IRS collection activity.
EXTENSION TO PAY - When paying in full, it may make sense to ask for an IRS extension to pay. If time is needed to put together the funds, a one-time extension can be requested, and in most cases, the extension can be as long as 120 days.
GUARANTEED INSTALLMENT AGREEMENT - $10,000.00 OR LESS - If the IRS debt is less than $10,000.00, the taxpayer can ask for a payment plan that divides the debt up over 36 months.
STREAMLINED INSTALLMENT AGREEMENT - $50,000.00 OR LESS - If the IRS debt is less than $50,000.00 assessed. the taxpayer can ask for a payment plan that divides the debt up over 72 months or the time remaining on the IRS' statute of limitation period of collection, whichever is less.
NON-STREAMLINED INSTALLMENT AGREEMENT - BETWEEN $50,000.00 AND $250,000.00 - If the IRS debt is more than $50,000.00 but less than $250,000.00. the taxpayer can ask for a payment plan that divides the debt up over the time the IRS has remaining to collect the debt.
"SIX-YEAR RULE" INSTALLMENT AGREEMENT - Where the taxpayer doesn't meet the criteria for streamlined or non-streamlined agreements and the IRS is using the taxpayer's financial information to determine the amount of the payment plan, most "actual" finances may be used if the taxpayer can pay the debt within the remaining time on the IRS' collection statute period or six years, whichever is less. Actual finances are those that may exceed the IRS' collection financial standards.
When the taxpayer can't afford to pay the debt in full using one of the options above, partial pay options should be considered. The IRS will typically agree to a partial pay option and stop collection activity when the taxpayer's situation meets the required criteria.
INSTALLMENT AGREEMENT BASED ON ABILITY TO PAY - If the IRS agrees that the taxpayer can't afford to “full pay” it will usually agree to a partial payment installment agreement. This means that it will agree to accept an amount that will result in less paid to the IRS than what is owed…in theory.
NON-COLLECTIBLE STATUS - If the IRS agrees that the taxpayer can't afford to “full pay” it will agree to accept nothing per month toward the debt where the taxpayer situation meets the non-collectible status guidelines.
OFFER IN COMPROMISE BASED ON INABILITY TO PAY - If it can be proven to the IRS that between assets and “excess” income the taxpayer can't pay the balance of the debt by the collection statute expiration date, the IRS should agree to settle the debt based on a formula.
PENALTY ABATEMENT - Certain IRS penalties can be “abated” or removed. Generally, penalty abatement only makes sense when the taxpayer is otherwise fully paying the debt off.
BANKRUPTCY - Certain IRS debt obligations can be treated as “discharged” in a bankruptcy. Even when the IRS debt obligation isn't fully dis-chargeable, a bankruptcy filing may still make sense in certain situations.
If the taxpayer has been assessed an IRS debt that is incorrect, sometimes it will make sense to challenge the debt. The following are the primary ways taxpayers challenge incorrect IRS debt assessments.
AUDIT APPEAL - An IRS tax return audit often results in a debt amount that is incorrect. Usually, the taxpayer doesn't or isn't able to fully participate and provide necessary proof documents or the IRS is wrong on the law. Sometimes a bit of both is creating the result. The taxpayer should be provided the ability to appeal the result “internally” and then to the U.S. Tax Court.
DOUBT AS TO LIABILITY OIC/AUDIT RECONSIDERATION/CP2000 RECONSIDERATION - If the deadline to file a “Tax Court Petition” is missed, the taxpayer may be able to ask the IRS to review additional/new information that was missed or not fully reviewed during the audit.
SFR CHALLENGE - If the taxpayer doesn't file a tax return timely, the IRS will often create a tax return for the taxpayer based on the information it has received from 3rd parties. The return is often incomplete and incorrect but the IRS will use the debt from this “substitute for return” to start the collection process. It will sometimes make sense for the taxpayer to create the missing return correctly, submit it to the IRS, and ask that the substitute return be replaced.
INNOCENT SPOUSE RELIEF - IRS rules allow an ex-spouse to request that the legal obligation to pay a tax debt to be removed/placed solely on the former spouse. There are different ways to request this treatment and which way or type is used will depend on a number of factors.
There are several pieces of information that are important to know before choosing the best way to resolve an IRS debt problem. This information can be gathered by contacting the IRS and asking for the information. IRS Account Transcripts, Wage/Income Transcripts, and Auditor reports and notes will also be helpful in verifying this information.
COMPLIANCE - First, the taxpayer must know whether the IRS considers him or her to be in “compliance”. Are there any missing returns, payroll tax related to the taxpayer that is unpaid, etc.
DEBT AMOUNT - Knowing the overall balance owed, the assessed balance, and debts that may be owed from returns not yet assessed is of great concern when trying to determine option(s). If audited and the debt amount is incorrect, information related to the audit adjustments is necessary as well
COLLECTION STATUS - The taxpayer must find out from the IRS what the “collection status” is. Determining whether the IRS can levy or garnish is important for obvious reasons.
CSED - Each tax year owed has its own collection statute expiration date on which the IRS will be barred from the collection. This date is relevant to almost every resolution option.
If the IRS debt is already in the system and an IRS “Final Notice of Intent to Levy” with appeal rights has been issued to the taxpayer's last known address, the IRS is usually in a position to levy accounts or garnish wages. At a minimum, the taxpayer should request more time be allowed to get compliance issues in order and to supply necessary disclosures and resolution requests.
An offer to full pay can be used to stop collection where appropriate. A payment plan request can be made where appropriate, to stop collection action even if the payment plan won't be the final option used to resolve the debt. Sometimes other options like bankruptcy, offer in compromise filing, and appeal hearing request(s) can be used to stop collection activity and resolve the debt if those options make sense under the circumstances.
All required tax returns have to be filed by the taxpayer and payment must often be made to satisfy the IRS that no new debt for the year will be owed. It will usually be impossible to resolve the tax debt long term without taking these steps.
In order to determine the best option, it's necessary to review income, budget, and asset history past, present, and future. It's also necessary to know the items mentioned in step one above, debt amounts, ages (CSED), collection status, audit history, etc.
Where an “Innocent Spouse” claim may make sense, more information about the couple's history, finances, and a number of other items must be reviewed.
In most situations, it will make sense to obtain professional help to determine the best path to take. Even if the taxpayer feels that a particular path is best, it is often the case that the taxpayer is missing some aspect of the analysis and thereby missing a better option, or is making a mistake that could prevent the use of a better option down the road.
Certain tax debt options are relatively easy to arrange once it's determined that the option is best and compliance exists.
Guaranteed installment agreements, streamlined agreements, non-streamlined agreements, and extension requests to full pay can typically be completed by the taxpayer with IRS Automated Collections or online without professional help.
Other options are more complex, require more analysis, preparation, detailed financial review and disclosure, and even legal argument. More complex options require as well, that a close eye be kept on IRS collection status, and other deadlines.
No matter the resolution used, the taxpayer will want to obtain written confirmation or confirmation via IRS account transcript review that the resolution is in place and that any levy or garnishment has been released.
If any disagreement with the IRS occurs, an appeal may need to be filed by the taxpayer as well.
Once a resolution is in place the taxpayer must file returns on time, ensure no new debt exists, and make any required payments. Certain options require the IRS to review the status on occasion. Each change in address should be provided to the IRS and any notices should be opened and reviewed immediately on receipt.
Many taxpayers will hire a professional to maintain contact with the IRS and to update the taxpayer with any news, notices, or other problems.