Navigating IRS Collections During an Economic Downturn

The financial downturn has left many taxpayers struggling with unpaid tax debts just as IRS collection efforts ramped up. Though a challenging time, the economic turmoil also created opportunities to negotiate with the IRS from a position of strength.

Negotiating with the IRS is always challenging. But with proper diligence and records, taxpayers can use downturns as leverage in working toward the best possible settlement. The opportunities recessions present will not last forever. If you owe back taxes to the IRS, act now, don’t wait.

Act Now – Don’t Wait for Better Times

Even with the economy in distress, taxpayers should not delay attempting to resolve IRS tax debts. Negotiating from hardship may provide more leverage, but postponing action is risky. The IRS continues aggressively pursuing collections and the statute of limitations does not pause for downturns.

Requesting extensions or waiting for the economy to rebound could allow interest and penalties to accumulate. And if statutes expire, taxpayers lose opportunities to contest tax debts. There’s also no guarantee a future negotiation would produce a better outcome.

The prudent strategy is to pursue a resolution proactively despite the conditions. Taxpayers will ideally get no better opportunity to settle debts at a discount or obtain payment terms fitted to their situation.

Diminished Income and Job Loss

As unemployment spiked during the recession, many taxpayers saw their incomes drop substantially or disappear altogether. According to IRS internal guidance, taxpayers earning less than $40,000 per year are often good candidates for compromised settlements or payment plans.

Losing a high-paying job can suddenly leave taxpayers meeting the low-income requirement for more flexible resolution of tax debts. Even taxpayers still earning above the threshold may convince the IRS their income reduction justifies special consideration.

It’s critical to promptly notify the IRS of any job loss or salary decrease. Be prepared to provide documentation. The IRS may temporarily delay collections while evaluating if your diminished income warrants compromise.

Falling Home Values

Plummeting home prices during the housing crisis reduced equity many taxpayers relied on to settle IRS debts. When negotiating with the IRS, significant equity or appreciation in a residence, particularly a primary home, is seen as an asset source for paying taxes.

With home values depressed, the IRS lost leverage pushing taxpayers to borrow against home equity. Lower housing prices also made it easier for taxpayers who qualified to request the IRS accept short sales or deed-in-lieu arrangements to satisfy tax obligations related to mortgaged properties.

Evaporating Savings and Investments

In addition to housing, stock market volatility ate away at many taxpayers’ retirement and investment accounts. While savings and stock accounts are rarely the sole barrier to resolving IRS debts, larger account balances do factor into the IRS’s analysis.

Taxpayers documenting retirement account losses found the IRS more amenable to excluding diminished savings from the required payment calculation. However, some assets like stock options are valued based on current markets, which could counterbalance decreases elsewhere.

Lost Access to Credit

As lenders tightened credit during the recession, some taxpayers saw once-substantial home equity lines of credit reduced or revoked. Likewise, small business owners lost access to operating lines of credit essential to staying afloat.

Since available credit impacts the IRS’s view of “collectible assets,” reduced credit access removed an obstacle for many taxpayers. Diminished borrowing capacity let taxpayers demonstrate they truly had fewer collectible resources available.

Exploring the Offer in Compromise Program

For many struggling taxpayers, submitting an offer in compromise (OIC) to the IRS is the optimal path to resolving debts. Under the OIC program, guided by Section 7122 of the tax code, taxpayers can settle tax liabilities for less than the total owed based on inability to pay.

To request an OIC, taxpayers submit detailed financial information proving they could not fully pay the debt in a reasonable time. This could include documenting lost income, diminished assets, and basic living expenses showing economic hardship.

The IRS will vet the offer and determine if it reasonably reflects payment potential. Offers below “reasonable collection potential” are generally accepted. This allows taxpayers to pay only what they can afford given their financial situation.

Of course, OICs are not guaranteed and require supporting your case. But the program provides an IRS-sanctioned avenue for taxpayers qualifying for relief based on economic challenges like those arising during recessions.

The Takeaway

The recession provides a unique opportunity for taxpayers struggling with unpaid IRS debts. Though economic downturns bring challenges, strategic taxpayers can use the conditions to their advantage in negotiating relief.

With the right approach, taxpayers can leverage financial hardships like job loss, evaporated home equity, and investment declines to strengthen their case for compromise. Meticulously documenting economic struggles is key.

Rather than postponing action, taxpayers should pursue resolutions proactively during recessions. Waiting may allow interest and penalties to snowball and forfeit options if statutes of limitations expire. There’s no guarantee a future negotiation would produce better terms than current conditions allow.