If you have a problem with the IRS, one thing is certain – it’s not going to go away by itself. Ignoring it is not an option, and each day you delay confronting the issue puts you in a worsening position in terms of potential exposure. Interest and penalties can be added daily. What you need is a strategy to deal with the underlying tax issue and a plan to stop the bleeding. There are, however, several potential options you may have depending on the facts and circumstances of your particular situation.
The Genesis of Back Taxes
As the name implies, back taxes are those not completely paid in the year due. The most common reasons for becoming delinquent on taxes include:
- Filing a tax return but neglecting to pay all taxes as indicated
- Misreporting or under-reporting income
- Failing to file a tax return
The nature of the reason why the incorrect tax amount was paid, as alleged by the IRS, including whether the actions were intentional or unintentional, is fundamental to the manner in which enforcement efforts are pursued, as well as the options you may have for settlement. Without the taxpayer’s cooperation or input, the IRS will enforce a back-tax judgment through such means as wage garnishment, bank account levies and property liens.
Currently not Collectible Status
If you qualify for this status, you are in essence agreeing with the IRS’ assessment of your tax debt, but you are indicating a present inability to pay. If the IRS agrees, it has concluded you cannot pay both your reasonable expenses of living and your back-tax obligation. During CNC status, however, the IRS will continue to assess penalties and interest and may periodically review your financial situation to confirm continued eligibility. Although efforts will not be actively initiated to collect back taxes, any tax refunds you have coming will be withheld.
You may be eligible to settle your tax obligation through monthly payments made over an established period of time. Among the installment agreement options the IRS will allow are:
- Guaranteed – If you can pay off your obligation in 36 months and it is $10,000 or less, the guaranteed installment agreement is a good choice if you otherwise qualify. Typically, if you have had no prior tax delinquency issues, are otherwise current on your taxes and promise and continue to stay current moving forward, you automatically qualify. The guaranteed plan is advantageous in addition because the IRS does not make you fill out a financial disclosure form, and it does not put a tax lien against you as long as you remain current on the payments.
- Streamlined – Similar to the guaranteed plan, the streamlined installment agreement is designed for those taxpayers who owe $50,000 or less with an ability to make monthly payments calculated to become current in 72 months. Although this plan comes with no financial disclosures and no tax lien, it is not guaranteed but must be approved by the IRS.
- Partial Payment – If your financial situation simply won’t permit either the guaranteed or streamlined plans and you owe $50,000 or less, the partial payment installment agreement may work for you. Basically, you calculate what you actually can afford to pay. The IRS will require you to fill out financial disclosure forms, may investigate to verify asset values and equities and may require a re-evaluation every two-years. In many cases, the IRS will file a tax lien to protect its interests during the duration of the installment term.
- Non-streamlined – If you’re looking at more than $50,000 of back taxes or need more than five years to pay off your obligation, it will be necessary to negotiate a specific agreement with the IRS. Unlike the other plans, a non-streamlined installment agreement is very difficult to arrange. With this amount of tax obligation, the IRS actively pursues other options for payment, such as sale of assets, loans or home equity lines of credit. These types of negotiations typically require a tax professional.
Offer in Compromise
An OIC, or simply an offer, is an agreement whereby you settle your back tax obligation for less than you owe. There are three primary reasons why the IRS may accept an OIC:
- Doubt as to collectability – The IRS is convinced you do not have sufficient assets to fulfill your full obligation and are unlikely to do so in the future.
- Effective tax administration – You can pay all that you owe, but it would create an economic hardship, or an unfairness or inequity would result.
- Doubt as to obligation – If there is a real question whether the money is owed, the IRS may agree to a lesser amount.
An OIC must be constructed such that payment is made in one of two ways. A lump sum offer consists of 20 percent down and the balance in five or fewer monthly payments. A periodic payment plan requires full payment within 24 months with the first payment due at the time of the offer.
More properly called first-time penalty abatement, the FTA is an administrative waiver the IRS may optionally grant a taxpayer under certain specific circumstances. Perhaps with the perspective that anyone can make a mistake, the FTA doesn’t forgive the underlying tax obligation, but it waives any additional sums added to the owed tax or alternatively may reduce the amount owed. The FTA is appropriate for tax penalties relating to:
- Failure to file
- Failure to pay
- Failure to deposit
Importantly, FTA is not available to those taxpayers who the IRS has flagged for tax accuracy matters.
Full forgiveness is extremely rare but may occur under special circumstances. One that may occur involves tax issues between spouses where one is completely unaware of the other’s activities, which is known as the innocent spouse scenario. The facts and circumstances supporting such a conclusion may alleviate the innocent spouse of tax liability but not the other.
Taxes may be one of the two certainties of life, but the amount you actually pay is not necessarily definitive. While it is certainly appropriate and the right thing to do to pay your fair share of taxes, there is no reason to pay more than the law requires you to pay. Be certain you fully understand your rights and obligations under the tax code.
For more information on this and other tax matters, consult the IRS or a qualified tax professional.