We often receive telephone calls and e-mails from individuals and businesses who have been contacted by the IRS for a tax obligation owing and they don’t know what to do. There are many options for dealing with these obligations. The correct option depends on the facts of the case. Unfortunately, too often, an individual or business does nothing, either because they are overwhelmed and don’t know what to do, or they hope the issue will go away on its own. We understand. We believe it will help if these taxpayers realize there are options, usually good options, for dealing with the IRS. So, this article is dedicated to summarizing some of these options so the taxpayer has a place to start.
File Returns to Show the Correct Amount Owing. Sometimes, when a taxpayer does not file returns, the IRS will prepare Substitute For Returns (SFRs). These are estimates of tax liabilities based on the information available to the IRS. The estimates are usually wrong, but the IRS believes they are better than nothing. The taxpayer can usually correct these numbers by filing their own returns. The IRS will usually make the adjustment.
Audit Reconsideration. Three are also situations where a taxpayer filed tax returns, and the IRS audited the return and made adjustments, but the taxpayer never presented the information to show the IRS that the adjustment is wrong. The IRS will often allow the taxpayer to present this information through an audit reconsideration.
Installment Agreement. The amount the IRS claims to be owing is correct, the taxpayer just wants some time to pay it off? The IRS will negotiate an installment agreement. If the obligation is less than $50,000, the taxpayer may qualify for a Streamlined Installment Agreement whish requires much less financial information and may allow the IRS to not file a lien.
Partial Payment Agreement. What if the taxpayer does not have the money or the equity in assets to pay the obligation in full? They may have the opportunity to satisfy the debt through a partial payment agreement or an Offer in Compromise. The partial payment agreement usually comes into play when a taxpayer has no assets and cannot raise the money to qualify for an Offer in Compromise. The partial payment agreement allows the taxpayer to pay his or her excess monthly income, that is the amount in excess of their reasonable and necessary monthly living expenses, as determined by the IRS, for the time remaining in the statute of limitations on collections.
Offer in Compromise. The Offer in Compromise is an agreement to pay the IRS either a lump sum amount or an amount within 24 months that represents the present value, a discounted amount, of the taxpayer’s excess monthly income and the equity in assets. This amount can, and often is, significantly less than the amount actually owing.
Currently Not Collectible. Sometimes, a taxpayer has no excess monthly income and the IRS classifies the taxpayer’s account as currently not collectible (CNC). This means the IRS will not pursue any enforced collection action, like levies. The individual with the IRS making this decision also decides at what income level the taxpayer’s case should be reexamined. So, if the taxpayer’s income never reaches the level set by the IRS, the IRS may never contact the taxpayer again. The statute of limitations on collections may expire and the IRS will write-off the balance owing.
Innocent Spouse Relief. Some taxpayers find they owe taxes from a married filing joint income tax return on income or disallowed deductions that are not from their income or deductions. Their spouse created a liability through actions over which the taxpayer had little or no influence or knowledge. In those situations, the IRS or the courts may be willing to eliminate the debt by granting them relief as an innocent spouse.
Bankruptcy. Many people are often surprised to discover they can eliminate their income tax debt in bankruptcy. In the right circumstances, income taxes, and the associated penalties and interest, can be discharged in bankruptcy.
Claim/Suit for Refund. Some taxpayer’s are discouraged after the IRS takes the money it claimed was owing, believing that the matter is over and they have no way to get their money back. These taxpayers may have the right to file a claim for refund or even a suit for refund to force the IRS to return the money.
Discharge/Subordination/Withdrawal of Federal Tax Liens. Sometimes, the barrier preventing a taxpayer from taking action to improve their situation is a federal tax lien. There are ways to remove or at least subordinate these liens so other parties, like purchasers or lenders, will work with the taxpayer.
These are not all of the options available to a taxpayer with a debt to the IRS, and all options are not available to all taxpayers. The thing to remember is that there are options and every taxpayer with a debt to the IRS should explore all of their options.