If the Service is after you or your assets, knowing your IRS tax debt relief options is the key to saving your cash and your sanity. If you don’t understand your rights and responsibilities, the IRS will roll over you, taking what they want. Here, I will describe how to keep the IRS at bay. You can find more detailed information on each option throughout this site.
First, let me define IRS tax debt relief. A tax debt is the amount you owe to the Internal Revenue Service, including interest and penalties, after you file a return, you are audited and agree with the results, or a tax dispute runs it course. In other words, IRS tax debt relief is focused on helping you resolve a tax debt after the amount due becomes permanent.
If you don’t agree with the results of an audit, you have options, such as filing an appeal or taking the issue to tax court. Though, if you fail to file timely, your right to fight on will be lost. If you believe the IRS is wrong, then you need a local tax attorney to handle your appeal or tax court petition. If the amount at issue is too small for an attorney, then you have the right to represent yourself in tax court. Though, I must say I have never seen this go well.
If the balance due has become permanent, or you have no plan to fight, then you have several IRS tax debt relief options. The most common, and often the best among them, is the installment agreement. When you negotiate an installment agreement with the IRS, you agree to make monthly payments and the IRS agrees to cease all hostile collection actions, so long as you keep paying.
The issue of contention with an IRS installment agreement is the amount you will pay each month. It’s based on the information you provide on Forms 433-A and 433-B, and the supporting documents you submit. These usually include your W-2, bank statements and proof of all bills… you didn’t think the IRS would take your word for your income and expenses did you?
The key to negotiating a successful installment agreement is organizing your finances, paying off any bills that the IRS won’t allow after the agreement is in place (such as credit cards), and making your 433-A and 433-B statements match the allowed expense standards. For information on these standards, go to www.IRS.gov and search for “allowed collection standards.” You will find out how much the IRS will allow for rent, food and clothing, automobile and all kinds of other expenses. Amounts vary by county and family size.
Note that an installment agreement can be one of the most powerful IRS tax debt relief options. This is because 1) the IRS has 10 years from the date of the assessment (usually when you filed your tax return or when the audit became final) to collect from you, and 2) the amount you will pay in an installment agreement is based on what you can afford, not the amount due.
So, your monthly payment should be about the same whether you owe the IRS $50,000 or $500,000. If all you can afford is $1,000 per month, that’s what you’ll pay. If your remaining collection statute is 4 years (because you’ve held the IRS off for 6 of the 10 years), then you will pay about $48,000.
At the end of the 4 years, your tax debt will be eliminated and you will be free of the great collector. The slate will be wiped clean and you get to start over.
There are a few caveats to this. First, tax liens might survive the 10 year collection statute. Also, the IRS will be more aggressive to collect on any assets, such as your home, on a debt of $500,000, and not so aggressive on a debt of $50,000. If you have no assets for them to take, this isn’t an issue… and the reason planning well in advance gives you the advantage when seeking IRS tax debt relief.
I would like to point out that this site is focused on people with tax debts of over $20,000. If you owe just a few thousand dollars, you don’t need to complete Forms 433-A or 433-B, or negotiate with the IRS. You can simply call in and request an installment agreement of $500 per month. So long as you keep paying, the IRS will leave you alone.
Finally, the above example assumes your income in the 4 years remaining on your collection statute does not increase. If your income goes up, or your allowed expenses go down, then the IRS will want the excess. If you get a raise, all of it will go to the collector.
The installment agreement described above, where you pay only a portion of the debt and the collection statute expires, is called a partial pay agreement. The IRS will watch the tax returns you file, and ask for updated financial information several times during the 4 years. If you’re in a partial pay agreement, you must be very careful with “extra” deposits in to your bank account and ensure your expenses remain constant. Also, you should not get married or make any other significant life changes while you are in an installment agreement.
While you are listed as currently uncollectible, the 10 year collection statute continues to run. So, if you convince the IRS to allow you in to this category, you can run out the clock, pay nothing, and get a fresh start at the end of the period.
The process to be considered currently uncollectible is the same as for an installment agreement. You complete Forms 433-A and 433-B and provide the supporting documents to prove your case. The most important part of this process is organizing your finances and financial statement to match the allowed standards.
Also, like the partial pay installment agreement, the IRS will review your finances every so often to determine if you still qualify for currently uncollectible status. If you send in a tax return with more income, or updated Forms 433-A and B show your income has increased, you will be taken off uncollectible and put in to an installment agreement.
The next form of IRS tax debt relief is bankruptcy. A tax debt qualifies to be discharged in a Chapter 13 bankruptcy if 3 years have passed from the due date of the return, or 2 years from the date the debt was assessed. This means that the IRS gets 2 to 3 years to come after you before you can discharge the debt in bankruptcy.
A tax debt is assessed after you have been audited and the balance due becomes final, or you file a return late. For example, if you file your 2011 tax return in 2014, the IRS has until 2016 to collect from you. If you file your 2013 return on April 15, 2014, you must wait until April 16, 2017 to dump that bill in bankruptcy.
Please note that I am not an expert in bankruptcy. I am focused on IRS tax debt relief and have been working as a tax attorney for 12+ years. For additional information on bankruptcy, I recommend you contact a local attorney.
The next form of tax debt relief is the innocent spouse claim. If you qualify, you can eliminate the amount of the tax debt that came from your spouse. In most cases, this requires you to be divorced, and you were not active in your spouse’s business, had no idea that taxes were not being paid, and did not benefit from the income that should have been taxed.
An IRS innocent spouse claim can be difficult to prove. The innocent spouse often derived some benefit from the income… it paid for the house you lived in, bought expensive clothes, etc.
Though, I have seen a number of successful innocent spouse claims. The most important component is that the “guilty” spouse was running a business that you had no involvement in.
If you can prove that you are an innocent spouse, you will not be required to make any payments, all tax liens will be removed, and the IRS will leave you be. Though, getting to that point is difficult and I recommend you hire an experienced professional.
Of course, innocent spouse relief only benefits the innocent spouse. The guilty spouse still must make payment arrangements or otherwise deal with the tax debt. If the innocent spouse has significant assets with are not community property, and the guilty spouse is uncollectible, then planning might be in order to file for innocent spouse, regardless of your living or marital situation.
The challenges of innocent spouse relief is one of the reasons I suggest that a family where one spouse is self-employed, or where the spouse who holds the assets has no risk of a tax debt, should use the married filing separate filing status. This form of preemptive IRS tax debt relief is far easier to achieve, costs only about $1,500 per year in most cases, and will ensure a happier home if things go badly.
The most popular IRS tax debt relief option is the Offer in Compromise. Listen to AM radio or watch cable TV for any period of time and you will hear all kinds of claims about the IRS Offer in Compromise program. The OIC has brought many tax firms down (for making false claims) and is very difficult to get approved.
As you read through the IRS tax debt relief options above, the installment agreement should be your first choice. The bottom line is that everyone qualifies for an installment agreement. If you can’t pay in full, and don’t have assets which can be taken to satisfy the IRS, you’ll get an installment agreement.
An Offer in Compromise is different. You have no right to an OIC and the IRS is unlikely to grant you one unless you can show that special circumstances apply. That’s right, in my experience, you must show good cause in order to get an IRS Offer in Compromise. This is something none of the marketing scammers want you to know… at least not until they have your cash in hand.
A showing of good cause is usually something that sets you apart from all of the others owing taxes. For example, if you were unable to pay for two years because of medical issues, your business went under, or something else outside of your control caused you to get out of compliance. Basically, you need to craft a powerful and plausible story as to why you deserve a fresh start in the Offer in Compromise program.
Also, you should have several years of tax compliance behind you. If you want an OIC for tax years 2011 and 2012, you should have filed and paid 2013 and 2014 on time. The longer you have been a “good” taxpayer, the better.
If you can craft a compelling story, then you may qualify for an IRS Offer in Compromise if your debt significantly exceeds your assets and income. If you owe $100,000, and you have $150,000 in a retirement account, you won’t get an IRS OIC. If you have $50,000 in equity in your home, and cash left over after your allowed expenses of $1,000 per month, then you can afford to pay $50,000 + ($1,000 x40) = $90,000 towards your debt of $100,000.
What about those cases where someone pays pennies on the dollar you ask? Well, if you can afford to pay $90,000 and you owe $1 million, then, in theory, your OIC might be approved for pennies on the dollar.
The documents required for an IRS Offer in Compromise is basically the same as an installment agreement. You must complete IRS Forms 433-A and 433-B and provide the necessary supporting documents. Also, like an installment agreement, your expenses are compared to the allowed standard. If your expenses, such as mortgage, rent, or auto are too high, you must reduce them to accepted levels. The IRS doesn’t like it when you drive a $100,000 Porsche, live in a mansion, and short Uncle Sam on your taxes.
Remember that you don’t have a right to an IRS Offer in Compromise as you do to an installment agreement. If the IRS believes it would be unfair to similarly situated taxpayers to let you walk away from your debt, they won’t. Even if you have no income and no assets, you may not be granted an Offer in Compromise.
For example, if you hid out for years, then file 6 delinquent returns, all with balances due, the IRS will not grant you an OIC. They will likely tell you that it is not in the best interest of the Service to allow non-filers a fresh start.
I also note that your (lack of) income and assets should be consistent for 2 to 3 years before you file an Offer in Compromise. If you made $400,000 in 2012 and $50,000 in 2013 and have no assets, the IRS won’t accept an OIC based on your 2013 income alone. They will either use a blended income rate from your last 3 years, or just take a “wait and see” attitude. The IRS is more likely to list you as uncollectible and review the situation in a year or two. If you are back to being a big earner, great, they will take their cut. If your income has remained at $50,000 for three years, they might consider an Offer in Compromise… especially if you have a good story as to what happened in 2012 and have been in compliance ever since.
I hope you’ve found this article on your IRS tax debt relief options helpful. If you owe money to the IRS, knowing your rights will give you an advantage when you go to battle with the agent. If you are caught off guard, they are likely to take everything they can get their hands on and leave you wondering what the heck happened.