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Tax Debt and IRS Debt Solutions

Written By:
September 17, 2010 at 10:12 PM

Given the poor economy, many Americans have found it difficult, and sometimes impossible, to pay that large tax bill they get at the end of the year. If you find difficulty in paying your normal or unexpected tax bill at the end of the year, several options exist to help you. Surprisingly, the Internal Revenue Service often offers several viable options, depending on the size of a taxpayer’s bill and the state of his or her finances and means.

You Must File Tax Returns

The first step in solving your tax problem is to deal with it rather than to ignore it. You must file your return, even if you cannot afford to pay the bill. You can also file an extension. Either way, do not attempt to ignore the problem or hide from the IRS. They will find you. The IRS doesn’t tend to just leave people alone.

Failing to file triggers an immediate penalty of 5% per month, assessed on the entire amount owed, up to 25% of the total tax bill. By contrast, the penalties assessed for filing a return but failing to pay the bill only total 0.5% per month.

Aside from the penalties, interest will accrue on your tax amount owed until you pay your bill entirely. Currently, the IRS charges approximately 4% interest.

Resolving Tax Debts

Taxpayers who owe the IRS less than $10,000 can fairly easily resolve tax debts without outside or professional help. Taxpayers who owe the IRS between $10,000 and $25,000 should seriously consider retaining a tax professional. Taxpayers who owe the IRS more than $25,000 must work with a qualified and experience tax professional.

Hiring the Right Tax Professional

Always investigate a tax professional’s credentials. Never work with someone who is not a Certified Public Accountant, Enrolled Agent, or tax attorney. The IRS will only deal with those three types of licensed and certified professionals. In fact, those are the only professionals even allowed to practice under IRS guidelines.

Unlike Enrolled Agents, who can practice in any state, attorneys and CPAs can only practice in the states where they are licensed.

The Costs

Tax professionals charge either an hourly rate or flat fees for their services. As a tax case can require copious amounts of data entry, calculation, documentation and management, you should ensure that you handle as much of these functions as you can in order to both minimize your fees and free your tax professional to focus on devising strategy and negotiating with the IRS.

Reduce Your Liability

Taxpayers who have not yet filed their taxes (but who know they will owe an amount that they will not be able to pay) must make sure to reduce their tax liability by taking every single legally allowable deduction (no matter how small).

Taxpayers who have already filed their taxes should ask their tax professional to review the returns in order to determine their accuracy. Often, taxpayers overlook or fail to take all of the deductions allowed. If you find that this is the case, ask your tax professional to amend the return. Keep in mind that amending your tax return requires copious paperwork and considerable reprocessing. Furthermore, amended tax returns must be perfectly accurate and must include strong supporting documentation. Any missteps in an amended tax return will trigger an IRS audit.

The first step in amending your tax return entails asking your tax professional to acquire the full documentation from the IRS and to compare it to the documents in your possession. This will allow your tax professional to advise you on the viability and benefit of amending the tax return.

The Five Strategies

The IRS employs aggressive collections tactics that include wage garnishment, asset liens, asset seizures, and collection agents. The receiver of these tactics faces financial hardship and high stress. Nevertheless, reasonable answers and comprises exist.

First, understand that any service or website that guarantees to settle the issue painlessly for “pennies on the dollar” is lying and will leave you poorer. Only five methods exist to save taxpayers from tax debt: Installment Agreement that will pay down the IRS debt at a scheduled monthly rate; Partial Payment Installment Agreement, a program that offers reduced principal while also providing a long term payment plan; Offer in Compromise, a program that allows taxpayers to settle tax debts for less than full value if paid in lump sum or over a short term payment program; Not Currently Collectible, a program in which the IRS agrees delay the collection of the tax debt; and, Bankruptcy, allowing a taxpayer to discharge tax debts under the governance of strict rules.

Installment Agreements

An installment agreement featuring a monthly payment plan provides the simplest arrangement for the payment of tax debt. The IRS offers four different installment agreements with different qualification requirements. Taxpayers seeking relief through an installment agreement must first determine for which, if any, they qualify. Once a taxpayer determines his or her qualification for one of the IRS installment agreement plans, that taxpayer’s professional tax advisor should then formally request it from the IRS.

If your tax debt totals less than $10,000 and you meet five criteria, then the IRS is required to offer you an installment agreement. The five criteria required to qualify for an IRS installment agreement include: no late filings or payments for the previous five years; filing of all tax returns; extinguishment of the tax debt in 36 months or less through the installment agreement; no installment agreements in the past five years; agreement to both file and pay on time all future tax returns. This plan requires financial statement documentation.

Aside from the financial benefit and the eventual resolution of the tax debt, installment agreements provide a key benefit to consumers, especially those who may want to purchase, finance, or refinance a home in the near future. Installment agreements prevent the IRS from filing a federal tax lien. Tax liens appear on your credit reports and negatively impact your ability to obtain credit, especially home mortgages, home equity loans and home mortgage refinancing. Those who manage to obtain a mortgage even with the low credit score caused by the reported tax lien will endure higher mortgage interest rates due to the subprime tier in which their credit history places them.

For taxpayers who owe less than $25,000, the IRS can also approve a Streamlined Installment Agreement that allows a taxpayer to extinguish the tax debt within 60 months. The same qualifications and criteria above apply to streamlined installment agreements. This plan requires no financial statement documentation.

Partial Payment Installment Agreement

For taxpayers who cannot afford either the installment plan or the streamlined installment agreement, the IRS can approve a Partial Payment Installment Agreement. Under this plan, rather than a fixed monthly payment that extinguishes the debt at the end of the installment period, the IRS will approve a monthly payment based on an amount that a taxpayer can actually afford after consideration of essential living expenses. At the end of the term of the partial payment installment agreement, the remainder of the tax debt is forgiven.

Unlike the regular and streamlined installment plans, the IRS may choose to file a tax lien against taxpayers who file for partial payment installment agreements. Also, the IRS will require financial statement documentation (Form 433-F) in order to ascertain average income and living expenses. Taxpayers seeking partial payment installment agreements must also provide paystubs and bank statements. Finally, unlike other installment agreements, the IRS periodically re-evaluates the terms of partial installment agreements to check whether or not a taxpayer’s financial condition has improved.

Note: taxpayers who owe more than $25,000 cannot access a prefabricated installment agreement and must negotiate their own installment agreement with the IRS. Those negotiating non-standard agreements can also seek extended payment terms. An IRS manager must approve such agreements. The IRS will also file a federal tax lien. Unique arrangements are often referred to as “non-streamlined” agreements. For such plans, the IRS will require financial statements and documentation (Form 433-F). The IRS also usually requires that taxpayers seeking such a plan sell assets, seek bank loans, or get a home equity loan or cash-out mortgage refinance in order to help pay the IRS tax debt.

Offer in Compromise

Taxpayers who file an Offer in Compromise ask the IRS to allow them to pay less than the full amount of tax debts owed. The IRS will accept such an offer if doubt exists as to the collectability of the debt. The IRS may also accept such an offer if doubt exists as to whether or not a taxpayer is actually liable for the tax debt. While paying less than you owe seems very attractive, keep in mind that the IRS approves only a very small fraction of the offers in comprise that it receives every year.

Taxpayers who receive acceptance of their offer in comprise must adhere four criteria: pay the offer amount in full; file tax returns and pay taxes due on time for the next five years; allow the IRS to keep any tax refunds, payments, and credits applied to the tax debt amount prior to the Offer in Compromise; and, allow the IRS keep any tax refunds payable during the calendar year of the Offer in Compromise.

Be very careful, if you fail to fulfill the terms of the offer contract, the IRS most likely will revoke the Offer in Compromise, leaving you to pay the full amount of the tax debt.

While an Offer in Compromise is a merciful way of clearing tax debt, as mentioned above, any organization promising to help you to “pay pennies on the dollar,” is probably simply looking for your dollars. While a successful Offer in Compromise will allow you to pay less than the full amount of tax debt you owe, along with less (or no) penalties and interest, you must first prove that the amount in the offer equals at least the reasonable collection potential (as determined by the IRS). The reasonable collection potential is the best estimate by the IRS of how much money you could raise in the next two years (given your financial statements, pay stubs, home value, home equity, asset values etc) to pay your tax debts.

Currently Not Collectible

The IRS can declare a tax due “currently not collectible” if it receives evidence that a taxpayer posses no ability to pay. You can request “currently not collectible” status by submitting Form 433-F. If you face severe financial hardship or tax debt burdens, immediately seek the help of a tax professional.

“Currently Not Collectible” status requires the IRS to stop collection activities, levies and garnishments. Also, remember that tax debt carries a 10 year statute of limitations. That means that if your non-collectible status lasts longer than 10 years, then the tax debt will expire.


Most taxpayers do not realize that they may be able to discharge their tax debts under the Bankruptcy Code. In order to discharge tax debt, a taxpayer must meet five criteria. Tax debts can be discharged if: the due date for filing the tax return in question was at least three years ago (including extensions); the taxpayer filed the tax return in question at least two years ago (from the date of filing); the tax assessment occurred at least 240 days ago; the taxpayer’s return in question was not fraudulent; the taxpayer holds no guilt for tax evasion. Be careful, tax debts from unfiled tax returns cannot be discharged through bankruptcy.





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