It’s a scenario that plays out for millions of people and businesses every year – after a quick trip to the mailbox you discover an ominous looking letter featuring the words “Amount Due” from the Internal Revenue Service (IRS). The notice also contains threats and suggests that the IRS will levy or seize your property!
For many people, such a notice or phone call from the IRS can feel intimidating or even hopeless. The unexpected balance due is often unaffordable, so if such a letter arrives at your home or office, what should you do?
Taxpayers on the receiving end of a tax demand letter may be surprised to learn that the IRS is generally willing to work with them to resolve their outstanding debts. It's crucial to understand the ground rules and what options are available to clear up the notices and follow a clear roadmap that doesn’t leave you in financial ruin.
What are the 3 Options for Complying with IRS Notices?
The first step in resolving your tax issue with the IRS is to achieve "tax compliance." Tax compliance means that you or your business has filed all required tax returns due for the last six years and have made all required estimated tax payments. If there are any missing tax returns or you have missed any estimated tax payments, the IRS will NOT settle your balances for any less than what you owe. Once you attain tax compliance, IRS personnel will consider other alternatives to full tax collection.
There are three primary collection alternatives to tackle a back tax debt: (1) an Installment Agreement, (2) an Offer-in-Compromise, and (3) Uncollectable Status.
An installment agreement involves paying your taxes over time. Once the IRS approves an installment agreement, you will then be required to make monthly payments. There are three installment agreement variations – regular, streamlined, and partial-pay. The most suitable option will depend on the unique circumstances of your case.
An offer-in-compromise is an agreement where the IRS accepts less than the total tax balance owed in exchange for a reduced lump sum payment. The IRS requires that you commit to paying the negotiated lump sum while maintaining tax compliance for five years following the offer's acceptance. Once all payments have been made, and you’ve maintained compliance, the IRS permanently closes your case.
An offer is based on any equity you have in assets you own along with your ability to make monthly payments. The IRS adds the total equity with the available monthly payment to determine the Reasonable Collection Potential (RCP). If your RCP is less than the total amount of the balance owed, the IRS will likely accept the offer.
Uncollectable status occurs when your current financial situation makes any other option impossible either because there is no money left over after your expenses to make monthly payment and you have no assets with available equity.
When this is true, the IRS will likely file a Notice of Federal Tax Lien to secure its position in your assets, but it won't initiate enforcement actions to seize or levy your assets or monthly income.
While the IRS will work with individuals and businesses to settle tax debt, navigating the bureau’s formal processes and procedures can truly be daunting for most taxpayers. Given the complexity and uncertainty surrounding such cases, it is always best to work with legal counsel to best position you for success.
Don't let IRS tax issues weigh you down any longer. There's a way to regain control of your financial life, and we're here to guide you through it.
- Senior Attorney
Joseph A. Peterson is a member of Plunkett Cooney's Business Transactions & Planning Practice Group and serves as leader of the firm's Tax Law Practice Group. He has extensive experience with tax law, risk management and litigation.
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