When it comes to settling your tax debt, there are 10 options “commonly” employed by resolution professionals (such as ourselves) or the individual taxpayer (see full explanations below):
» Full pay the tax owed
» File unfiled returns to replace Substitute for Returns (SFR’s)
» Dispute the tax on technical grounds
» Currently Not Collectable
» Installment Agreements
» Offers In Compromise
» Penalty Abatement
» Discharging taxes in bankruptcy
» Innocent Spouse relief
» Expiration of the Collection Statute
OPTION ONE – Full pay the tax owed
While seldom a popular option, sometimes the taxpayer does have the ability to pay the tax outright or borrow against an existing asset e.g. refinance a home mortgage or take out a home equity loan.
Surprisingly, in this situation, this option is usually the least costly of viable options available to the taxpayer. The reason for this is two-fold:
» The taxpayer’s equity in assets will usually disqualify the taxpayer from benefiting from options which grant debt forgiveness.
» Until the tax debt is paid in its entirety, it will continue to accrue additional penalties and interest.
OPTION TWO – Filing unfiled tax returns and replacing Substitute for Returns
When resolving a tax problem, it is relatively common to find that the taxpayer has back tax returns which have not been filed. There are three reasons why it is necessary to file the required back tax returns and get the taxpayer “Current” so to speak:
» Failure to file tax returns may be construed as a criminal act by the IRS and can be punishable by one year in jail for each year not filed. Filing unfiled returns brings the taxpayer “Current”
» Filing unfiled returns to replace “Substitute for Returns” may lower the tax liability owed and the associated interest and penalties
» A settlement cannot be negotiated with the IRS until the taxpayer becomes “Current”
OPTION THREE – Dispute the tax on technical grounds
If there is a technical basis to dispute the amount of tax owed, there are a number of paths to consider, including:
» Filing an amended return if the statute of limitations to file has not expired
» Filing an Offer In Compromise – Doubt as to Liability
OPTION FOUR – Currently Not Collectable Status
If a taxpayer does not have positive cash flow above the level to pay their necessary living expenses or have equity in assets to liquidate, the taxpayer may qualify for Currently Not Collectable Status (CNC). This is most commonly seen when the tax payer is unemployed or underemployed. In this situation, the IRS places a temporary hold on the collection of the tax owed until the taxpayer’s financial situation improves. If over a longer period of time, the tax payer’s financial situation does not improve, the taxpayer may then become a viable Offer In Compromise candidate.
OPTION FIVE – Installment Agreements
In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan the taxpayer must meet set criteria. They include:
» The taxpayer must be current- all returns must be filed
» Disclose all assets owned
» The difference between the taxpayer’s monthly income and allowable monthly expenses will be the amount that the IRS will request that the taxpayer pay on a monthly basis
» Monthly payments will continue until the taxes owed are paid in full
OPTION SIX – Offers In Compromise
The IRS Offer in Compromise program provides taxpayers that owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final settlement.
» This program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
» The Offer in Compromise program allows taxpayers to get a fresh start.
» All back tax liabilities are settled with the amount of the Offer In Compromise.
» All federal tax liens are released upon IRS acceptance of an Offer In Compromise and payment of the amount offered.
An Offer in Compromise filed based on the taxpayers inability to pay the IRS looks at the taxpayer’s current financial position and considers the taxpayers ability to pay as well as the taxpayers equity in assets. Based on these factors, an Offer amount is determined.
» Taxpayers can compromise all types of IRS taxes, penalties and interest.
» Even payroll taxes can be compromised.
If the taxpayer qualifies for the Offer In Compromise program, they may be able save thousands of dollars in taxes, penalties and interest.
OPTION SEVEN – Penalty Abatement
In most cases, penalties make up 10-30% of the total tax obligation. A penalty abatement request can eliminate some or all penalties if the taxpayer has reasonable cause for not paying the tax on time or paying the appropriate amount of tax.
Reasonable cause includes:
» Prolonged unemployment
» Business failure
» Major illness
» Incorrect accounting advice
» Incorrect advice from the IRS
To prevail in a penalty abatement request, as in most tax matters, the burden rests with the taxpayer to be able to adequately document the reasonable cause.
OPTION EIGHT – Discharging Taxes in Bankruptcy
Bankruptcy can discharge federal income taxes if certain requirements are met. However this depends upon both the type of bankruptcy and the type of tax owed.
Chapter 7 is the chapter of bankruptcy law that provides for the liquidation of non-exempt assets and the discharge of dischargeable debts. Chapter 11 and Chapter 13 provide for repayment of debt in whole or in part.
To discharge taxes in bankruptcy, a number of criteria must be met including:
» 36 months have expired from the tax return due date
» 24 months have expired from the date the tax was assessed
» 240 days have passed since the tax was assessed and filing bankruptcy
» All tax returns must have been filed
OPTION NINE – Innocent Spouse relief
Sometimes a taxpayer will find themselves in trouble with the IRS because of their spouse’s or Ex-spouse’s actions. The IRS realizes that these situations do in fact occur.
In order to help taxpayers that have tax problems which are due to the actions of their spouse, the IRS has developed guidelines for taxpayers to qualify as an innocent spouse. If a taxpayer can prove they meet these guidelines, then the innocent taxpayer may not have to pay some or all the taxes caused by their spouse or ex-spouse.
OPTION TEN – Expiration of the Collection Statute
The IRS has 10 years from the date of assessment (usually close to the filing date) to collect all taxes, penalties and interest from the taxpayer. The taxpayer does not owe the tax after the 10-year date has passed.
Listed below are some of the most common exceptions to this rule:
» If the taxpayer agrees in writing to allow the IRS more time to collect the tax
» If the taxpayer files bankruptcy during the 10 year period
» If the taxpayer files an Offer In Compromise.