Unpaid Tax Debts

We Help With IRS & State Tax Collections

The IRS and state tax authorities continue to step up their efforts to collect unpaid tax, penalties, and interest.

IRS collections efforts typically include the IRS issuing tax liens and/or seizing or garnishing paychecks and bank accounts, vehicles and other personal or business property, and real estate. The IRS may even enlist the courts to take property from the taxpayer or others who hold property belonging to the taxpayer.

Prevent Unlawful Collections

In most cases, it may be possible to get the IRS to agree to a temporary collection hold from the IRS. This collection hold can afford the taxpayer an opportunity to gather their financial records and file any missing tax returns.

There are times an informal collection hold is insufficient. There are a number of ways to halt IRS collections activities, including filing a collection due process hearing request or collection appeal process request, entering into a payment or installment agreement with the IRS, filing an offer in compromise to try to settle the tax debt, or, in some cases, filing a bankruptcy petition.

How the IRS processes the case depends on who is working the case. The IRS computers handle many IRS collection cases. Others are assigned to revenue officers “in the field” to work. And other cases are farmed out to private tax collectors.

There are several legal, procedural, and policy rules that the IRS has to follow when taking these collection activities. There are also legal, procedural, and policy rules surrounding all of the collection alternatives mentioned above. There are also special rules for U.S. military personnel who owe back taxes. Let’s look at each option closer.

1. IRS Offer in Compromise

About the Offer in Compromise

The offer in compromise is the process used to settle unpaid taxes for less. If successful, it results in an agreement between the taxpayer and the IRS that settles tax liability for payment of less than the full amount owed.

The IRS’s power to settle tax debts is set out in Section 7122. This broad power is summarized in the IRS’s policy manual as follows:

the Service will accept offer in compromises when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or a protracted installment agreement.

An offer in compromise covers all tax, penalties and interest for the type of account for the tax periods covered by the offer.

The IRS and the taxpayer are prohibited from reopening a tax period covered by the offer in compromise. There are exceptions. For example, the tax period can be reopened if there was a falsification of information or documents, concealment of the ability to pay and/or assets, or a mutual mistake of material fact that is of enough significance to cause the agreement to be set aside or reformed.

There are three different grounds for submitting an offer in compromise. They include (1) doubt as to collectability, (2) doubt as to liability, and (3) to promote effective tax administration.

Doubt as to Collectibility

A doubt to collectability offer may work if there are genuine doubts exists that the IRS will be able to collect the full liability amount within the collection period. So, a taxpayer who is able to pay his or her tax debt in full or through an installment agreement is not be eligible for an offer in compromise based on doubt as to collectible.

One has to consider the taxpayer’s reasonable collection potential to determine the offer amount. This includes analyzing the taxpayers assets and disposable income given IRS guidelines.

This can be challenging, as there are a number of rules and IRS policies that come into play. There are a number of situations where it is difficult to apply these rules. For example, taxpayers with variable income may find it difficult to apply these rules.

Note that taxpayers who have a current bankruptcy proceeding are generally not eligible until after the bankruptcy case is closed.

Doubt as to Liability

A doubt to liability offer may work when there is a genuine dispute to the existence or amount of the correct debt under law. Note that this type of offer cannot be accepted for a tax liability that has been finally settled by the courts.

Effective Tax Administration

An effective tax administration offer may work when there is no doubt that the assessed tax is correct and no doubt that the amount could be collected, but the taxpayer has economic hardship or other special circumstance
which would allow the IRS to accept an offer in compromise.

Note that this type of offer is only available for individuals, not businesses or other entities.

General Requirements for Offers

To be eligible for an offer in compromise, the taxpayer must file all tax returns that are legally required to be filed, have received a bill for at least one tax debt included in the offer, have made all required estimated tax payments for the current year, and have made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

Payment Options for Offers

Taxpayers can propose two different types of payment terms–lump sum and periodic payments. A lump sum cash offer is any offer of payment made in five or fewer installments within five months of acceptance of the offer.

A periodic payment is any offer in six or more installments. The total installments cannot exceed 24 months.

Submitting the Offer

The taxpayer has to initiate the offer in compromise process. At a minimum, this includes submitting the IRS’s offer in compromise form, a collection information form, and the application fee.

An oral agreement with the IRS to settle a debt generally does not count as an offer in compromise.

Note also that a taxpayer does have to provide financial information for all household members, even if they are not part of the offer and they do not owe any taxes.

While the Offer is Pending

During the period that an offer in compromise is being reviewed by the IRS, the statute of limitations for assessment and collection is suspended. The IRS will keep any refunds due to the taxpayer for any tax period while the offer is pending.

It is usually best to file the offer before the IRS imposes an ongoing levy, as submitting an offer does not obligate the IRS to lift a pre-existing levy. It does however prevent the IRS from instituting new levies (absent a jeopardy situation).

The IRS will also not remove pre-existing lien notices and it may also still file liens after the offer is submitted.

The IRS only has two years to either accept, reject, or return an offer in compromise. If it fails to act, the offer will be deemed accepted by the IRS.

2. Installment Agreements

Installment agreements are just what they sound like. They are agreements between the IRS and the taxpayer that allow the taxpayer to pay their taxes over a period of time.

There are several different variations of installment agreements. This includes guaranteed installment agreements, streamlined installment agreements, and partial payment installment agreements.

Guaranteed Installment Agreements

Guaranteed installment agreements can help individual taxpayers who have small balances. This type of installment agreement applies if the taxpayer owns $10,000 or less (not including penalties or interest). To qualify the taxpayer has to have filed all prior tax returns for the prior five years and paid all taxes due thereon, not entered into a prior installment agreement, and agree to pay the entire balance within three years.

Streamlined Installment Agreements

Streamlined installment agreements can help those who cannot qualify for a guaranteed installment agreement due to the amount of their balances. This type of agreement may be obtained by paying the tax debt down to be under the threshold. The threshold is $50,000 or less.

The threshold for streamlined installment agreements were increased from $25,000 or less to $50,000 or less under the IRS’s “Fresh Start Initiative.” However, the requirements are slightly different for amounts of $25,000 or less versus amounts between $25,001 and $50,000.

Partial Pay Installment Agreements

The partial pay installment agreement is often the preferred agreement. Partial payment installment agreements were allowed by the American Jobs Creation Act of 2004. It allows the taxpayer to avoid fully paying the tax debt.

With partial pay installment agreements, the Taxpayer must agree to pay the maximum monthly payment amount based on the Taxpayer’s ability to pay. This requires an analysis of the taxpayer’s reasonable collection potential under the IRS’s guidelines.

In order to qualify, a Taxpayer must be in compliance with filing, withholding, federal tax deposits, and estimated tax payment requirements.

Penalties & Interest Continue to Accrue

While installment agreements can be an excellent way to manage tax debts, they can be problematic in some cases. During the period of the installment agreement, penalties and interest continue to accrue. So a taxpayer could find themselves owing way more under the agreement than they would if they had simply paid the balance off.

This is why it is often advisable for taxpayers to negotiate the lowest monthly payment plan possible, and make payments in excess of the scheduled installments to pay off the debt sooner. The taxpayer can also propose an installment agreement in excess of their reasonable collection potential.

The IRS will often file a lien notice before entering into an installment agreement. But the IRS is not required to issue a lien notice, so taxpayers may push back when the IRS says that the lien notice is required.

Requesting Installment Agreements

Note that a taxpayer will not qualify for an installment agreement if he or she is not current on all tax filings. For many taxpayers, the first step is to go back and file all misting tax returns. If the taxpayer has not filed for several years, the IRS will typically require at least six years worth of tax returns on file.

Depending on the amount due and the status of the case, the taxpayer may be able to submit the installment agreement request online. But if the balance is larger, the taxpayer is a business, or a revenue officer is assigned to the case, the taxpayer generally cannot use the online system. They will have to work with the IRS over the phone or talk to the IRS revenue officer.

3. Currently Not Collectible Status

The IRS has the authority to put an account with an outstanding tax balance on currently not collectible status. This authority is set out in policy statement 5-71.

Currently not collectible status can be an excellent resolution for those who are not able to pay their tax liabilities currently.

About Currently Not Collectible Status

During the period that the taxpayer is determined currently not collectible, the statute of limitations for the IRS to collect continues to run and penalties and interest continue to accrue.

The IRS will often file a notice of federal tax lien if the aggregate unpaid balance equals or exceeds $10,000.

An account that is determined to be currently not collectible should be monitored and the IRS should follow up with the taxpayer every few years. In most cases, this involves sending a form letter to the taxpayer each year reminding the taxpayer of the growing tax balance. In other cases, the taxpayer doesn’t receive any contact or the case is eventually assigned to a revenue officer to work.

Qualifying for Currently Not Collectible Status

Generally, an account can be put on currently not collectible status if the IRS determines that the taxpayer has no assets or income which are, by law, subject to levy. The IRS can also put an account on currently not collectible status if the taxpayer can establish that a levy would create a hardship. Generally, a hardship exists if a levy would prevent the taxpayer from being able to pay their necessary living expenses. This is something more than payment being a mere inconvenience.

There are other cases where the currently not collectible can be used. For example, it may be used if the IRS is not able to locate the taxpayer or assets, if the statute of limitation for collection has lapsed or is about to do so, the person dies and there is no collection potential for the estate, the taxpayer is a business that cannot pay its back taxes but it can remain current going forward, and the IRS isn’t able to contact the taxpayer although the address is known and there is no means to enforce collection, as in the case of a taxpayer who is in prison, hospital, or foreign country.

Requesting Currently Not Collectible Status

The IRS will sometimes place accounts on non-collectible status on its own. But in most cases, the taxpayer has to request currently not collectible status and submit financial statements to the IRS.

Getting Help With Unpaid Taxes

Taxpayers often have to request a collection due process hearing or collection appeal program consideration to forestall the IRS’s enforced collections actions.

The IRS’s Collection Due Process Hearing

The IRS’s Collection Due Process Hearing (CPP Hearing) gives taxpayers an opportunity to have the IRS Office of Appeals consider collection actions proposed by the IRS collection function.

The CDP Hearing is a right that is afforded to taxpayers in the Code. It applies to the first notice of levy issued by the IRS and first notice of lien filed by the IRS.

The CDP Hearing can be used to raise issues relating to the collection methods, to propose collection alternatives, or challenge the liability (in limited circumstances). Note that the IRS does not have to consider all open years if they are not included in the CDP Hearing request.

The IRS’s decision in CDP Hearings is appealable to the U.S. Tax Court.

The IRS’s Collection Appeal Program

The IRS’s Collection Appeal Program (CAP) allows the IRS Office of Appeals to consider whether the IRS is complying with the collection laws before collection actions are allowed to continue.

The CAP can address a variety of collection actions. But the existence of or amount of liability can’t be considered. Collection alternatives, such as an offer in compromise, also cannot be considered.

Unlike CDP hearings, the determinations from CAPs are final and can’t be appealed.

Taxpayers have to submit a Form 9423 to request CAP consideration.

See How We Can Help With Your Tax Debt

An experienced tax attorney can help ensure that the IRS and states follow these rules and that the rules are used to your benefit rather than your detriment. If your case is in collections you need to speak to an experienced tax attorney.

Please call us at (713) 909-4906 or contact us online to schedule an appointment.


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