Along with increased collection efforts by the IRS come a variety of options, which, with proper professional guidance, reduce the pain by making resolution easier, more flexible and less expensive, while leading to a fresh start sooner.
The pain of tax season is a distant memory―or so you thought. You timely filed, or properly extended and recently filed, your 2018 income tax returns. It’s over, right? Not if you didn’t pay all you owed. If you have outstanding tax liabilities, the IRS will eventually come knocking―if they haven’t already. Balance due notices, burdened with late payment penalties and interest, have arrived or will soon arrive. What options do you have if you could not satisfy your 2018 tax liability or you currently owe income taxes for earlier years? Here are a few options:
Set Up a Payment Plan
You can now set up an installment agreement with the IRS online in a matter of minutes. Historically, individuals who owe $50,000 or less in combined tax, interest and penalties qualified for the online option. In an effort to make installment agreements easier for more taxpayers, the IRS has increased, although only temporarily at this time, the threshold from $50,000 to $100,000 for “Streamlined Installment Agreements.” This allows for people with balances up to $100,000 to establish an installment agreement with payment terms of up to 84 months without filing a detailed financial statement with the IRS. Based on the success of the test period, the expanded criteria may be made permanent. As of this Alert, the IRS has not completed this study nor concluded on the effectiveness of this increased threshold. We suspect that if collections improve and increased volumes of taxpayers with outstanding tax debt are removed from the delinquent rolls, this increased threshold will continue. However, you should act quickly if you qualify, as this advantageous program could end at anytime.
If you owe more than $100,000, you may qualify for an installment payment arrangement, but you must file a detailed financial statement form with the IRS. This form collects information about your income, necessary living expenses, assets and liabilities, among other disclosures, and allows you to propose an installment payment amount. The IRS frequently refuses proposed agreements, and there are many reasons for this, including:
- The IRS defines “necessary living expenses” differently than the taxpayer and requires a much larger monthly payment than is otherwise affordable.
- The IRS, based on its own investigation, believes untruthful information was provided.
- The IRS believes it can collect the unpaid debt sooner through levying of assets than the taxpayer proposes.
- The taxpayer defaulted on a prior installment arrangement.
As we often say, don’t go it alone and attempt to initiate a payment arrangement without seeking professional guidance, as every situation is different. If you have outstanding tax debt and are considering an installment agreement, we would be pleased to discuss with you the unique aspects of your individual situation.
If you are unable to pay your tax liability through an installment payment plan, you may be eligible for an offer in compromise.
Settle for Less by Submitting an Offer in Compromise
The offer in compromise (OIC) program permits qualified taxpayers with outstanding and unpaid tax liabilities to negotiate a full settlement for an amount that is less than the tax owed. An OIC agreement will generally not be accepted by the IRS if it believes that the outstanding liability can be paid through a lump sum or other type of payment arrangement. The IRS will review the taxpayer’s income, expenses, assets and liabilities in great detail to assess a taxpayer’s ability to pay. Recently, the IRS began implementing stricter compliance for the program. In the past, the IRS would allow you to file all required tax returns while an offer in compromise was pending. Now, the IRS will return any newly filed applications if you have not filed all required tax returns prior to submitting the application. Any application fee submitted with the offer will be returned as well, but the deposit of the tax being offered with the application will not be returned but rather applied to your outstanding tax liability.
Although you may hear various advertisements promoting the ability to discharge tax debts by filing bankruptcy, it’s not as easy as these ads attempt to convey. Most delinquent tax liabilities cannot be discharged in bankruptcy. Those with outstanding and unpaid tax liabilities may wish to consider a bankruptcy proceeding under either Chapter 7 or 13 of the U.S. Bankruptcy Code. In a Chapter 13 filing, tax debts are never discharged, but must be repaid in full according to the terms of a repayment plan approved by the bankruptcy trustee and creditors. The repayment plan will last between three and five years. If you must file for bankruptcy protection, Chapter 7 is likely the better route, as you may have the ability to have all tax debts discharged in full, but only if all of the following requirements are met:
- The tax debt must be income-based tax debt. Trust fund taxes or fraud-based assessments are not eligible for discharge.
- There must not be, nor have been, any willful attempt to evade tax liabilities.
- During your bankruptcy, you must continue to file or obtain a valid extension of time to file all required returns.
- During your bankruptcy case, you should pay all current taxes as they come due.
- Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
- Tax debt typically cannot be discharged in bankruptcy until three years after the due date of the tax in question, and must have either not yet been assessed or have been assessed within 240 days prior to any bankruptcy filing.
Be sure to consider all the implications of a bankruptcy filing before considering this option. There may be long-term negative implications of filing, such as a lowered credit rating, which may remain for up to seven years, seriously impacting your ability to obtain financing. Also, a bankruptcy filing will result in filing fees, court costs, legal fees and other expenses.
Before you consider this approach, it’s best to perform a tax dischargeability analysis and seek our advice.
Innocent Spouse Relief
Another method of satisfying outstanding tax debt is through the Innocent Spouse Relief Program, although this may be a bit more challenging as you must prove that your spouse, or former spouse, incurred and became liable for a tax debt without your knowledge. Innocent spouse relief may be an option in situations where your spouse or former spouse failed to report or underreported income, or fraudulently claimed deductions or credits to which they were not entitled. Innocent spouse relief is more complex than simply claiming you were unaware of these issues. Certain documentation must be filed with IRS to secure relief. Once the IRS receives your submission, it will investigate comprehensively. Don’t navigate this complicated method alone.
If you are not pursuing one of the above options, recent changes in the enforcement actions by the IRS make it imperative that you satisfy your tax obligation sooner rather than later:
Private Debt Collection
Prompted by congressional action, four authorized private debt collection agencies have been pursuing old tax debts that the IRS had stopped chasing due to a lack of resources. Since IRS collection scams are increasingly prevalent (read about one of our client’s experiences), in order to avoid scams, the IRS first issues letters to those taxpayers who will be contacted by the debt collection agencies. The letter issued by the IRS will include the name and contact information of the firm that will be contacting the taxpayer. The authorized firm will then follow up with their own letter confirming the handling of the case. Unlike scammers, initial contact will never occur by phone. Therefore, if you receive a call from a debt collector and have not received a letter in advance, exercise caution. Even more importantly, these debt collectors are obligated to respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act. So, no strong-arm tactics, no personal visits, no dinner hour or middle of the night phone calls. If you have unresolved tax liabilities and are contacted by a private debt collection agency, contact us prior to responding to their outreach. There are options to reduce or eliminate the pain of an experience with a private debt collection agency.
Restriction of Passports
Also prompted by congressional action, the IRS is actively advising the U.S. Department of State regarding U.S. citizens with seriously delinquent tax debts. As a result of these notifications, the State Department is aggressively pursuing those with tax debts, and will take action within 90 days of notification. Citizens who have federal tax debts in excess of $52,000, including interest and penalties (adjusted for cost of living each year) may have their U.S. passports revoked. Additionally, U.S. citizens residing or travelling overseas may have their passports limited to only return travel to the United States. Again, in a recurrent theme, you have options if you must travel. Citizens who have such tax debt can avoid passport revocation and/or restriction if they enter into an installment agreement or an offer in compromise with the IRS, are granted innocent spouse relief or pay the debt in full. This will impact all taxpayers with seriously delinquent tax debt, whose travel will be restricted until they have an arrangement in place with IRS. For additional details, see our Alert on this topic, and contact the practitioner with whom you are regularly in contact with for immediate assistance.
State Tax Enforcement
In addition to the IRS taking greater enforcement actions, some states have been following suit. States such as New York and Massachusetts began suspending and/or revoking a taxpayer’s driver’s license for unpaid state taxes. For example, New York can suspend your driver’s license if (1) you owe more than $10,000 in taxes, penalties or interest, and (2) no collection resolution is in place (such as an installment agreement or offer in compromise).
IRS, and now states, are continually and aggressively pursuing enforced collection of outstanding tax liabilities. Along with increased collection efforts by the IRS come a variety of options, which, with proper professional guidance, reduce the pain by making resolution easier, more flexible and less expensive, while leading to a fresh start sooner. We continue to monitor IRS and state collection techniques and activity closely. If you have unpaid tax debt, we urge you to act promptly. While tried and true resolution options such as those within this Alert may be helpful to you, more advanced options may be needed to attractively settle outstanding tax debt. The best advice if you find yourself facing an IRS collection matter is to get into compliance as quickly and strategically as possible. In any instance, do not commence negotiations with the IRS or any taxing authority directly.
For Further Information
If you would like more information about this topic or your own unique situation, please contact Mary Beth Lee, CPA, CFE, or Steven M. Packer, CPA, senior managers in the Tax Accounting Group, or the practitioner with whom you are regularly in contact. For information about other tax and accounting topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.