A lot of worry comes into the mind of a Taxpayer who just got the bill from an audit, had a return done that showed a balance due, or someone who has not paid or filed in years. When you can’t pay back taxes to the IRS or state, you are not stuck and do have options.
See our video explanation below, then keep reading for more information:
There are still options when you can’t pay your taxes in full to the Internal Revenue Service, and I will go through the options below:
Currently Not Collectible Status
This is the same thing as a payment plan with a monthly payment of $0. The IRS determines you have no ability to pay. Usually cases put in Currently Not Collectible status will also qualify for an Offer in Compromise. Sometimes your tax attorney will put it in this status first, to make sure all garnishments and levies are released prior to submitting your Offer in Compromise.
Other times, you might not qualify for an Offer in Compromise due to equity in something that exceeds the tax debt, but the IRS still determines you have no ability to pay on the debt. In these scenarios, your case could be put into Currently Not Collectible Status.
A payment plan is sometimes the only option, and significantly changes based on how much you owe. The IRS treats the debt differently depending on how much is owed. If you owe less than $50,000 there are a lot more payment plan options. When you owe over $50,000 the IRS is going to go thoroughly through your financial information to determine what your “ability to pay” is. They make this determination partly based on your numbers and partly based on figures called the “Collection Financial Standards.”
For this reason it is highly recommended to get a tax attorney if you owe over $50,000 to ensure that you do not get stuck in an extraordinarily high payment plan. Even people that do not qualify for a settlement are still much better off having a tax lawyer assist them so they do not get stuck in a very high payment they cannot afford.
Even if you are in a payment plan you still can save some money on the back end by doing a penalty abatement. This can more often than not be done on the first year for which you owed. A common mistake by many CPA”s, EA’s, and other tax attorneys is requesting a penalty abatement too early. Many firms have a standard policy to send out a penalty abatement after the client has been on a payment plan for six months. This is the wrong strategy. A penalty abatement should be applied for when the tax year for which the balance is owed is close to being paid off. The reason for this is that the tax penalty for failure to pay is accruing based on the balance being in the account. If the failure to pay penalty is abated and the client has not come close to paying off the tax year, the penalty will just re accrue and the abatement only saved the client a small amount of interest on the penalty.
Offer In Compromise
This is our most sought after result, but is purely based on financial information. You will hear many ads for companies offering to settle your debt for 10% of the total debt or for pennies on the dollar. I can tell you the figures they are giving you are compeltely meaningless. The offer amounts and accepted amounts are purely based on financial data and how well your tax attorney can legally manipulate it in your favor. CPA’s and Enrolled Agents can help you with this as well, but if you are looking for the best results a tax attorney is recommended. The IRS takes requests from attorneys more seriously (I was told this by a CPA early in my career and did not believe it at first, as technically CPA’s and EA’s are licensed to do much of the same work in Offer In Compromise, but this has come to hold true over the years).
An Offer in Compromise will be calculated based on your household available monthly income and equity in assets. The household available income is determined the same way it is for Currently Not Collectible Status or a payment plan, where they compare your expenses against your income, and mix in some “IRS Collection Standards” for things like food that are harder to track. The equity in assets is determined by finding what you have left after loan or mortgages against your assets when they are sold at a “quick sale value,” which the IRS has determined to be 80%. For example, you have a home worth $500,000 and owe $250,000. The IRS would determine you have $150,000 in available equity. Having a tax lawyer on these issues also helps and I have been able to get much lower valuations than my CPA counterparts, resulting in settlements being accepted for less.
If anyone promises you an Offer in Compromise with certainty over the phone, they are lying to you. In a phone consultation I can give you a good idea of the odds of receiving a settlement, but no one can be for sure until thoroughly going through your financial information. Make sure to disclose everything to your attorney fully, so they can represent you going in with the best information.
Another thing to note is the IRS settlements are strictly determined on the financials. Meaning you do not settle for a percentage of the debt or “pennies on the dollar.” In December of 2014, I settled a tax debt of $50,000 for $68. This was due to the client only collecting a small pension, a small amount of Social Security, and having no other assets. It turned out to be about one tenth of one cent on the dollar, much better than “pennies on the dollar!”
You might owe some money, but all of the above options will keep the IRS from garnishing your wages or levying your bank account. You might even be able to get out of the entire debt for a very low amount!