Can’t pay your taxes? Consider these tax debt-relief options

Many taxpayers who owe money to the IRS, either as an individual or as a business, feel trapped in a stressful situation without resolution. With the IRS planning to step up enforcement and many taxpayers finally back on track after COVID-19-related disruptions, now is the time to resolve tax debts.

Fortunately, the IRS offers several programs to alleviate the tax collection burden and allow taxpayers a chance to obtain a fresh slate. The options available include a standard installment agreement, partial pay installment agreement, offer in compromise, currently not collectible status, penalty abatement, and bankruptcy. Read on to learn more about these options so you can be prepared for proactive conversations with your tax advisor about addressing IRS collections for any outstanding tax debts you may have.

6 IRS programs to help taxpayers resolve tax debt

1. Installment Agreement

An installment agreement consists of monthly installment payments to pay a tax debt in full prior to the Collection Statute Expiration Date (CSED). A common misconception is that a taxpayer’s balance must be below $50,000 to qualify for an Installment Agreement. However, this payment option is available for most tax debts, regardless of how much is owed. Here’s more information about installment agreements:

• Terms are available for as long as 120 months.
• Tiered agreements which allow a gradual increase in monthly payments at certain dates, may be available.
• Agreement terms and payment amount may be up to the discretion of the IRS, depending on the balance and a taxpayer’s financial situation.

2. Partial Pay Installment Agreement (PPIA)

A partial pay installment agreement is an agreement between the taxpayer and the IRS to pay monthly installments starting from the agreement date until the Collection Statute Expiration Date (CSED). The main difference between an installment agreement and a partial pay installment agreement, is that with a PPIA, the IRS will only receive a portion of the balance owed and will write off the unpaid balance. Here are some more details:

• Taxpayers who can not afford to pay their tax debt in full before the CSED are ideal candidates for PPIAs.
• Many taxpayers who may not qualify for an offer in compromise may still qualify for a PPIA.
• The IRS may periodically request updated financials to determine continuing eligibility at the current payment terms.

3. Offer in Compromise

Similar to the PPIA, an offer in compromise is an agreement between the taxpayer and the IRS to make a payment or series of payments to satisfy a tax debt in full for less than the full amount owed. However, it is more difficult to qualify for an offer in compromise than a PPIA. In 2022, approximately 37% of offer submissions were accepted by the IRS. Strategizing with your tax advisor before submission and timing of the submission is key to a successful and favorable offer. A few things to keep in mind:

• The most common ground for acceptance – Doubt as to Collectability – requires very strict financial analysis to determine eligibility.
• Generally, the formula to determine eligibility and an acceptable offer is “Reasonable Collection Potential” which is the net equity in assets in addition to a multiple of available monthly income.
• Submitting an offer in compromise extends the CSED for the period of time that it is pending (plus thirty days), thereby extending the date which collection of the tax debt will be unenforceable. Therefore, the decision to submit an offer in compromise must be made carefully so as not to do more harm than good.
• The Internal Revenue Manual’s section on financial analysis provides much more insight into the analysis process.

4. Currently Not Collectible (CNC) status

Currently Not Collectible is a status available to taxpayers unable to pay due to financial hardship. Here’s more information:

• Taxpayers who are facing a temporary or permanent income decline may want to consider this option.
• Qualifying generally requires showing an inability to pay basic living expenses and delinquent tax debt.
• Essentially, the CNC status stops active IRS collections but does not extend the CSED the way an offer in compromise submission does.
• The IRS may periodically request updated financials to determine continuing eligibility.

5. Penalty Abatement

Penalty abatement is a reduction of penalties which leads to a reduction of the total tax debt that is owed. This option is generally available through one of two channels: Reasonable Cause or First-Time Abatement.

• Reasonable Cause may be established by demonstrating that the taxpayer exercised ordinary business care and prudence, and was nevertheless unable to file a return and/or pay taxes on time. Valid reasons to establish Reasonable Cause may include fire, natural disaster, death, or serious Illness.
• First-Time Abatement is available for select penalties when a taxpayer has a satisfactory history of compliance, depending on the tax type.

6. Bankruptcy

Most taxpayers want to avoid bankruptcy, which is generally considered a last resort. However, it may make sense in certain situations. It’s important to keep in mind, however, that not all taxes are dischargeable in bankruptcy. Consult with your financial advisors, tax professionals and attorney before deciding to file for bankruptcy.

Avoid future tax compliance issues

Taxpayers who choose to use one of the options above to resolve their tax debt with the IRS should make every effort toward future compliance. The IRS wants to see that a taxpayer does not continue to accumulate tax debt and that delinquencies are a thing of the past. Taxpayers who obtain one of these tax debt-relief options and later incur a new balance, risk defaulting on their arrangement with the IRS.

Taxpayers with outstanding tax debt should consult with a qualified tax professional who has expertise in IRS collections procedures and resolutions before engaging in discussions and attempting a resolution with the IRS. Additionally, a tax professional can assist with proper tax planning, including advising on estimated tax payments to help taxpayers avoid surprises when filing tax returns. As stated above, it’s important to stay in compliance going forward in order to maintain any IRS arrangement.

Contact Kaufman Rossin’s Tax Controversy & IRS Resolution Services team for assistance with resolving your personal or business tax issues.