There are 19 million taxpayers who owe the IRS can cannot pay. Each year, 30 million taxpayers owe when the file a tax return – about 4 million of these taxpayers cannot pay their balance and need an option. The taxpayer has two alternatives: get into an arrangement with the IRS on their balances or face IRS collection enforcement, including federal tax liens and levies. Fortunately, taxpayers have options when it comes to their back taxes, including extensions of time to pay, payment plans, and hardship relief.
IRS Collection facts:
- You generally receive a few notices before IRS liens and levies: before the IRS enforces collection of back taxes, it will send a series of notices, called the collection notice stream. A taxpayer can receive up to 5 notice, a month or so apart, until the IRS sends their account to IRS collection for possible lien and levy action. Those who have owed in the past may receive as few as two notices, compressing the notice cycle down to a couple of months before they enter IRS collection.
- Penalties add up, but are less if you are in a payment arrangement: when you owe, you get assessed a failure to pay penalty. This penalty is 0.5% per month unless your are in IRS collection where it ratchets up to 1.0% per month. Good news: if you get into a payment arrangement, the FTP penalty goes down to 0.25% per month.
- Don’t ever file late because you can’t pay: many people do not file because they cannot pay when they file and fear the worst will come from the IRS. This is always a bad decision. First, intentional nonfiling can be met with criminal penalties (Al Capone was sent to jail for nonfiling). Second, the failure to file penalty is steep – 5% per month, up to 25%. The moral here: file and get into an agreement with the IRS on the balance owed.
- The only safe place to be is in an agreement with the IRS: taxpayers who owe and are in an agreement with the IRS on the balance are in “good standing.” They avoid levies and possibly passport restrictions and liens when they owe larger amounts.
- You can only have one agreement with the IRS: if a taxpayer owes for multiple years, they do not get separate agreements on the balances for each year. If a taxpayer is in an agreement, such as a payment plan, filing and owing a new balance will default any exisiting agreement.
- Filing compliance is required: to get into an agreement with the IRS on a balance owed, a taxpayer must have filed all required returns. Generally, this requires that the taxpayer have filed at least the current and past six years returns to be considered in “filing compliance” (IRS Policy Statement 5-133).
- You could have your passport restricted if you are not in an agreement with the IRS: taxpayers who owe more than $51,000 (adjusted annually for inflation) and are not in a qualifying agreement risk being certified as having “seriously delinquent tax debt.” The IRS send the taxpayer a notice of this status and also informs the State Department, who can proceed to restrict or deny a passport.
- Yes, you can settle back taxes – but it is rare: in 2017, out of the 19 million taxpayers who owe the IRS, only 25,000 settled their taxes for less than the amount owed. The settlement solution is called an “offer in compromise.” There are two reasons why few people can get an OIC: they don’t qualify based on their financial siutaion or they do qualify but cannot pay the settlement amount (called an offer amount) to settle the debt. There is hope here: the OIC is not always the best solution if you are in a hardship situation – currently not collectible status or a small payment plan may be a much better choice.
- The IRS has 10 years to collect: the collection statute expiration date (“CSED”) is 10 years from the tax the tax was assessed. There are a number of situations that can extend the CSED, such as leaving the country for a prolonged period or filing an offer in compromise. CSED calculations can get complicated and differ in each tax year, based on the filing date and any additional assessments – like an audit. After the CSED expires, the IRS writes off the debt.
- Fees with payment plans and OIC: only extensions to pay and currently not collectible status have no set-up or application fee. Payment plan set up fees range from $31 to $225, depending on how the taxpayer sets up the arrangement (online v. form/call) and how you pay (by direct debit/payroll draft v. by check). OICs have a $186 application fee plus a down payment, based on which OIC payment method selected.
- Tax lien filing rules: all taxpayers want to avoid a federal tax lien. Federal tax liens are public record and will affect property transactions and may affect your ability to borrow. A lien may also hurt your business or restrict you from employment if your customers/employer sees you as a credit risk due to the lien filing. Taxpayers can avoid a lien if they timely get into a qualifying agreement and owe under $50,000. If a taxpayer ignores the IRS and is not in an agreement on a balance of $10,000 or more, the IRS is likely to file a tax lien.
- Most common levies are wage garnishments and bank levies: with no agreement, the IRS can enforce collection through levies. A levy is a seizure – but don’t be alarmed- the IRS only seizes physical property in the most egregious tax debt cases. Most seizures come in the form of a bank levy or a wage garnishment. Bank levies are “one-time” levies – that is, the IRS takes the amount in a taxpayer’s account at the time of the levy. Wage garnishments continue each paycheck until the amount of debt is satisfied. If a taxpayer has a levy/garnishment, they can get into an agreement with the IRS and get the levy released.
- Automated Collection v local collection: the IRS generally collects through its automated notices, which can also issue liens and levies. However, for businesses, taxpayers with larger balances owed, and for taxpayers who are both tax debtors and nonfilers, the IRS usually enforces collection locally. The local collection person is called a Revenue Officer who can closely investigate and enforce collection.
- The IRS will generally allow you to pay with 72 months: if you owe less than $100,000, the IRS will generally let you pay the amount off in 72 months providing that the collection statute expiration date is longer than 6 years. Taxpayers should be warned that balances over $50,000 usually come with a federal tax lien filing.
Solutions:
There are several agreement options available that will help taxpayers avoid tax liens, levies, and increased IRS scrutiny. The first step before a taxpayer secures a collection option with the IRS is to look to see if the taxes and penalties assessed are correct. You have three years after the return is filed or two years after the tax is paid, whichever is later, to amend a tax return and reduce the amount owed. Taxpayers should also consider penalty relief options to reduce the amount owed.
Extension to pay:
For taxpayers who need an additional time to pay, one option is to get a 120 day extension to pay with the IRS. This option is free and allows the taxpayer to gather funds or get a loan to repay the IRS. This option also allows the taxpayer to pay the balance down to get into more favorable payment terms and/or avoid a federal tax lien.
Payment plans:
The IRS has several payment options. There are payment arrangements that allow the taxpayer to pay over 36 months if they owe less than $10,000 (called a guaranteed installment agreement) or over 72 months if they owe less than $50,000 (called a streamlined installment agreement. These “simplified” agreements usually provide more favorable payment terms, avoid federal tax liens, and be completed online in most circumstances. If you owe more than $50,000, all IRS options, including payment plans, get complicated because the IRS will want financial information to determine how much you can pay. Taxpayers can currently pay balances over 84 months if they owe between $50,000 and $100,000, but they must pay by direct debit and endure the filing of federal tax lien. Taxpayers with balances above $100,000 face detailed financial scrutiny by the IRS, including requests to liquidate assets to pay down balances owed.
Currently not collectible status:
If a taxpayer cannot pay, the IRS has a hardship status called currently not collectible (“CNC”). Taxpayers must prove to the IRS that they cannot pay by filing financial information with the IRS. The IRS first looks for any liquid assets or equity in assets that the taxpayer has to pay the debt. After using assets, the IRS looks to see if the taxpayer can pay with monthly payments. To determine whether the taxpayer can pay, the IRS compares the average monthly household income with the average amount of necessary living expenses. If the taxpayer has more expenses than income, than the IRS will put them in CNC status until their financial situation improves. Keep in mind, the IRS does not allow all of the taxpayer’s monthly expenses – only those that are necessary living expenses. The IRS also puts limits on the amounts that can be paid for these expenses (called the “collection financial standards”).
Offer in compromise: doubt as to collectibility:
If a taxpayer does not have the ability to pay, either with equity in assets or through monthly payments, before the collection statute of limitations expires, the taxpayer should consider an offer in compromise- doubt as to collectibility (OIC-DATC). In this case, the IRS projects that it will never collect before the collection statute expires and will agree to settle on an amount that is their reasonable collection potential. OIC-DATC qualification and the amount proposed to settle the debt can be difficult to compute. The rules to determine asset values, equity in assets, and average monthly income and expenses are complex. Misapplying these rules can costly because taxpayers have to pay a user fee and a down payment with the submitted OIC-DATC.
Offer in compromise- effective tax administration:
If the taxpayer can pay with assets and/or monthly income, an OIC-DATC does not apply. However, if they have special circumstances that warrant the IRS settling on less than the balance owed. These types of settlements are called an offer in compromise for effective tax administration (OIC-ETA). In OIC-ETAs, the taxpayer has special circumstances in which the collection of the tax would create an economic hardship or there is a compelling public policy or equity considerations that provide a basis for the IRS to compromise the liability. There are few OIC-ETAs allowed each year. Most OIC-ETAs are allowed when taxpayers need their equity or future income for a hardship situation, like future long-term care for an illness or medical condition.
Federal tax lien options:
The best option is to avoid the filing of a federal tax lien. A taxpayer can avoid a federal tax lien by getting into a timely agreement with the IRS on a balance owed of $50,000 or less. If a tax lien has already been filed, the solutions are to pay the balance off in full (obtain a levy release) or to request a lien withdrawal. There are several reasons to request a lien withdrawal. If a taxpayer wants to borrow funds or transfer property, they may need to request lien subordination, subrogation, or discharge.
Levy release:
Most levies are in the form of a wage garnishment, bank levy, or an accounts receivable levy. Again, the best way to avoid a levy is to get into an agreement with the IRS. However, if a taxpayer has a levy, they can get the levy released by getting into an agreement with the IRS. Qualifying agreements include the extension to pay, payment plans, CNC, or an OIC. Generally, the IRS will immediately release the levy if you have the bank and employer contact information on hand when you get into the agreement with the IRS.
Passport restriction decertification:
In 2018, the IRS began sending seriously delinquent taxpayers notices and their information to the State Department for purposes of restricting their passport use. Taxpayers who face this situation need to get into an agreement with the IRS immediately to have their seriously delinquent status “decertified” and passport restrictions lifted. Seriously delinquent taxpayers are those individuals who owe $51,000 (adjusted for inflation each year) and are not in a qualifying agreement with the IRS. Once the restrictions apply, paying under $51,000 does not decertify the taxpayer from being a seriously delinquent tax debtor. The only solution is to get into good standing-with the IRS- that is, an agreement with the IRS on the back taxes.
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