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What To Do If You Owe the IRS and Can’t Pay

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July 23rd, 2020

Posted in IRS & Tax Information

Now that this year’s Tax day has passed, you may have discovered that you owe more on your tax return then you can afford to pay. Here are some tax resolutions and tips to get your IRS debt resolved before it’s too late:   

1. Installment Agreements

Individuals who owe $50,000 or less in income tax and businesses that owe $25,000 or less in payroll tax may qualify for an Online Payment Agreement. You can set up the payment for any amount you can afford as long as the debt is paid in full within 72 months (6 years). You can also modify installment agreements through the program as well. 

If you need longer than 72 months to pay your debt or you owe more than $50,000 the IRS will likely request a Collection Information Statement (Form 433-F). This form provides an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay per month.

Keep in mind that interest and late-payment penalties continue to accrue on any unpaid taxes. Penalties may be reduced for reasonable cause or under the IRS’s first time abatement program.

2. Currently-Not-Collectible Status

If your financial statement shows that your expenses outweigh your income and you do not have assets that can full pay the debt, then you may qualify for Currently-Not-Collectible (CNC) status.  In this resolution, you do not have to pay anything towards your debt but interest and penalties continue to accrue. It’s like a student loan forbearance. The IRS may also review your account in a year or two to see if your financial situation has improved and if your able to make monthly payments. While you qualify for CNC, the IRS will not take any enforced collection action against you such as bank levies or wage garnishments. However, the IRS will file a federal tax lien. In addition, it’s possible to remain in CNC for the entire period the IRS has to collect the debt — which is usually 10 years from the date the tax is assessed (barring any extension of the collection statute).  

3. Offer in Compromise

Upon the IRS’s acceptance of your offer based on your reasonable collection potential, you pay the IRS a percentage of what you owe. Once you pay that amount, the rest of your debt is forgiven subject to the agreement terms (for example, you must timely file and pay all taxes for the next 5 years). To qualify, you will have to submit Form 433-A(OIC), Form 433-B(OIC) if applicable, and Form 656. The offer amount is based on your disposable income and equity in assets, and not how much you owe the IRS. As a general rule of thumb, if you can afford to make monthly payments that will full pay the liability, you are unlikely to qualify.

4. Bankruptcy

Certain taxes are not dischargeable in a bankruptcy, such as newer income taxes, trust fund taxes, and unassessed taxes. In order to discharge a tax liability, there must have been a return filed more than 2 years ago, the return due more then 3 years ago, the taxes assessed more then 240 days ago, and no fraud or willful evasion in connection with the return. This is a high-level overview and seeking a tax opinion as to dischargeability is advisable as there are further details and exceptions.

Things to keep in mind to ease the process:  

  • File your tax returns timely to avoid additional late filing penalties (different from failure to pay penalties).
  • Stop the “bleeding” and pay your estimated tax payments. Consider increasing current tax year’s withholding.
  • Review your return with a professional to ensure you claimed the proper deductions, etc.
  • Consider not only the IRS tax debt but also your other debts in formulating a strategy.

In the end, come up with the best “game plan” for you. The options to resolve a tax debt are not overly complicated. However, how to go about the options can be extremely complicated. If you are still overwhelmed and need guidance, it’s best to contact a tax attorney who is authorized to represent you before the IRS.

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