Many people and businesses may owe taxes to the IRS and need to resolve such debts.  Common resolutions to a tax liability would be an installment agreement, a partial payment installment agreement, an offer in compromise or having the liability placed in a non-collectible status.  Each of these resolution is discussed in more detail below.

Installment Agreement

An installment agreement is an agreement with the IRS whereby a taxpayer and the IRS agree to the taxpayer making a monthly payment on or before a certain day of each month, which will resolve the total tax debt.  Depending upon the amount of tax owed and the amount the taxpayer is willing to pay, an installment agreement may be formalized without financial disclosure.  However, after the liability exceeds a specific amount and/or the taxpayer is requesting to pay an amount less than what the IRS would want, the taxpayer would need to disclose their current financial circumstances to the IRS.  An individual would complete Form 433A and a business would complete Form 433B.  An installment agreement can be formalized with a revenue officer or through automated collections if a revenue officer is not assigned to the file.

Important facts to keep in mind regarding an installment agreement are:

1) Penalty and interest continue to accrue while you are making payments.

2) The failure to pay penalty is cut in half to .25% per month.

3) The failure to timely make a payment or make a payment in full will default the agreement.

4) The accrual of an additional tax or failure to timely file a tax return will default the agreement.

5) The IRS can still file a notice of federal tax lien.

Partial Payment Installment Agreement

A partial payment installment agreement is similar to an installment agreement except that if the taxpayer continues to make the agreements as agreed upon for the remainder of the collection statute, the tax debt will not be paid in full.  For example, say Jeff owes the IRS $175,000 and there is 5 years remaining on the IRS collection statute.  Jeff completes Form 433A and has monthly disposable income of $1,500.  Thus, if Jeff paid $1,500 per month to the IRS for 60 months, payments would only total $90,000.  The above facts apply to a partial payment installment agreement, and in addition, the IRS can and generally does request an updated financial statement from the taxpayer every 24 months.  If the updated financial statement shows an additional ability to pay, the IRS can and generally will request that the monthly payment be increased.

With the recent changes made to the IRS offer in compromise, generally if an individual would qualify for a partial payment installment agreement, they could likely qualify for the offer in compromise program and settle their tax debt.

Offer in Compromise

An Offer in Compromise can be considered a tax settlement.  The taxpayer proposes to pay an amount to the IRS that is less than the total amount of tax due in full satisfaction of the debt.  From the above example, Jeff may offer the IRS $18,000 to settle his $175,000 debt.  The offer amount is based off of the taxpayer’s ability to pay, which is determined by the taxpayer’s equity in assets and disposable income.  The taxpayer will complete the appropriate financial statement and Form 656.  The offer is submitted to the IRS Offer in Compromise Unit, and an examiner is assigned.  Usually it take anywhere from 6 to 12 months to receive a determination from the offer unit.  The offer could be accepted, rejected but a higher amount proposed, rejected because the IRS states you can full pay the debt or returned.  If the offer is returned, the taxpayer has no appeal rights.  If the offer is rejected, the taxpayer can provide additional information for consideration and has appeals rights with the IRS appeal office.

Some important facts regarding an offer are:

1) Penalty and interest continue to accrue while the offer is being reviewed

2) There is an automatic hold on IRS enforcement while the offer is being reviewed

3) The IRS collection statute is tolled (not running) while the offer is being reviewed

Currently Non-Collectible Status

Currently Non-Collectible Status is when the IRS agrees not to collect from a taxpayer because based off of the taxpayer’s equity in assets and disposable income, the taxpayer cannot pay.  Generally, if a taxpayer can be placed into non-collectible status, they could qualify for the offer in compromise program and thus may want to consider an offer to resolve their IRS debt.

There are other resolution options as well such as bankruptcy, IRS penalty abatements, innocent spouse relief and equitable relief options.  A tax attorney can analyze your current circumstances and assist you with your options.  You can speak with a Denver tax attorney by contacting the McGuire Law Firm and scheduling a free consultation.