IRS Collection Snapshot

As tax attorneys, we strive to reduce the amount of taxes our clients have to pay. This goal is best accomplished when we assist someone in a transaction to provide the most advantageous tax structuring from the outset. Unfortunately, many of our clients come to us after the deal has been consummated, when there is little to be done. And, while we work hard to minimize the impact of an audit, it is not uncommon for a business or individual to conclude an audit with a balance owed to the IRS. The question then becomes what are your options in regards to paying these taxes. The IRS has established three potential means of collection for taxpayers unable to full-pay their liabilities.

The first, and most common, method is an installment agreement. Generally, an installment agreement is a series of monthly payments made by the taxpayer to the IRS. The time-frame for an installment agreement depends on two factors, 1) the length of time the IRS has to collect on the tax owed, and 2) the amount the IRS believes you can pay per month. There is a general 10 year period after the tax is assessed for which the IRS can collect on a tax. There are many things that can extend this time that need not be addressed in this post.

As for the second factor, the IRS determines what a taxpayer can pay by examining their financial information. After the IRS establishes the taxpayers monthly income, the IRS subtracts their reasonably allowed monthly expenses. The result is the amount the IRS reasonably believes the taxpayer can pay. per month. This amount is then extended out for the remainder of the 10 years that the IRS has to collect. The IRS is allowed to review the payment amount during the course of the agreement to ensure they are collecting the proper amount.

The second means of paying a tax debt is to submit an Offer-in-Compromise. The initial stages of an OIC are very similar to an installment agreement, wherein the IRS determines a reasonably expected monthly payment. Only the OIC goes further into the taxpayer’s finances to look for all potential sources of income/payment. They add any additional income to the monthly amount and multiply by a factor associated with the amount owed and time-frame for collection. The IRS then adds the collectible equity the taxpayer has in any assets to the prior sum. This final amount is known as the reasonable collection potential of the taxpayer, and is generally the minimum amount the IRS will accept as full-payment. The IRS is also able to make a determination on the possibility of future income of the taxpayer, and this can lead the IRS to deny an OIC if they believe there is the potential to full-pay the amounts owed.

The OIC is often misrepresented by companies as a “pennies on the dollar” tax payment option. This marketing is unfair to the taxpayer looking to get back on their feet when faced with past due taxes. First, around only 25% of offers are accepted by the IRS. This program is not a sure-shot for taxpayers. Furthermore, once you file an OIC you extend the statute of collections by at least one year. If your offer fails then you have granted the IRS more time to collect, and are no better off than when you started.

The final option for taxpayers is to qualify for currently-not-collectible. To qualify for this option the IRS has to determine that your monthly expenses are equal to or more than your monthly income. This is a good plan for those individuals that do not expect to increase their income during the remainder of the collection period, or for those that are close to the statute of limitations timeline. The hazard with the not collectible status is the continual accrual of interest and penalties that can quickly cause a rather small amount to become over-whelming. Also, with this status the filing of liens against the taxpayer is a near automatic process.

Your tax professional should take great care in explaining all of these options to determine which direction is best suited for your situation. We have seen too many individuals come to our office that paid good money to other businesses that promised to erase their taxes and nothing was done or the taxpayer did not have their case sufficiently explained to them. When working to resolve your tax problems communication with your adviser is vitally important.

 

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