Matthew Von Schuch Tax Attorney and CPA 7 METHODS TO RESOLVE IRS TAX DEBT Offer in Compromise Settling tax debt for less than owed Installment Agreement A payment plan for tax debts Non- Collectable Status Stops IRS collection activity Penalty Abatement Remove penalties from your account Innocent Spouse Relief Relieve yourself of the responsibility of paying a joint tax debt and much more The IRS is the most powerful creditor you can have. After all, the government has a duty to ensure that tax revenue is collected and that everyone pays their fair share. It should come as no surprise, therefore, that the IRS has many powerful tools at its disposal to collect back taxes. For example, other creditors must first go to court and get a judgment before they can start forcibly taking your property. The IRS, however, is able to garnish your wages, seize your bank accounts, and place liens on your property without having to do so. Many people find themselves in debt to the IRS often as the result of difficult financial circumstances, a fraudulent tax preparer, or simple negligence. No matter the reason you may find yourself in this position, you are not alone. In 2014 the IRS collected $57.6 billion in back taxes, filed 535,000 tax liens, and made almost 2 million levies. Given the IRS s broad authority and ability to quickly move against your property, resolving a tax debt requires a strategy that both stops the IRS's immediate collection efforts and also attempts to bring about a final resolution to your debt. There are generally 7 methods accomplishing one or both of these goals. Determining which method is right for you will depend on your particular situation. 100 South Mason Street Harrisonburg, Virginia 22801 (540) 438-5344 www.mvstax.com
1. Offer in Compromise An offer in compromise is a settlement of your tax debt for less than the full amount owed. The IRS will accept an offer on three grounds: (1) your inability to pay the full amount of the tax, (2) doubt as to your liability for the tax (if you have not had another opportunity to challenge the tax), and (3) for administrative efficiency. Offers are most often filed based on a taxpayer s inability to pay. Filing an offer on this basis requires you to disclose your personal finances to the IRS, which will be closely scrutinized. Be warned, it will take the IRS a very long time to accept or reject an offer; usually at least 6 months. But, if you qualify, the IRS will forgive a portion of your tax debt in return for your agreement to pay the remaining balance of the debt in either a lump sum payment or monthly installment payments over two years. Filing an offer also stops the IRS s collection action while the IRS is considering your offer. Quick Facts on Offers in Compromise: Applying for offer in compromise stops IRS levies Settles tax debt for less than full amount owed Form 656- B, form to apply for offer in compromise Form 433- A (OIC), financial disclosure form for individuals Form 433- B (OIC), financial disclosure for businesses Filing Fee: $186 Where More Information on Offers in Compromise: http://www.irs.gov/individuals/offer- in- Compromise- 1 2. Installment Agreement An installment agreement is simply a payment plan. The longest term the IRS will agree to is 72 months. If the IRS accepts your proposed installment agreement, you agree to pay the full amount of the debt over time including all interest and penalties and, in exchange, the IRS will stop its collection action. If you owe less than $10,000, have filed and paid all taxes for the last 5 years, you agree to pay your debt within 3 years, and agree to file and pay returns in future years, then the IRS is required to enter into an installment plan with you. Page 2
Quick Facts on Installment Agreements: Applying for installment agreement stops IRS levies You are guaranteed installment agreement if you owe less than $10,000 The IRS offers a Fresh Start program that permits you to obtain an installment agreement without making financial disclosures if you owe less than $50,000 or your business owes less than $25,000 Maximum term of installment agreement is 72 months Apply online if you owe less than $50,000 or your business owes less than $25,000 Form 9465, form for individuals to apply for offer in compromise Form 433- F, financial disclosure form for individuals Filing Fee: varies depending on how you agree to make payments Where to find More Information on Installment Agreements: http://www.irs.gov/individuals/payment- Plans- Installment- Agreements 3. Partial Installment Agreement A partial installment agreement is a special type of installment agreement that the IRS will enter into with taxpayers who are suffering from a severe financial hardship. Under a partial installment agreement, you are able to enter into a payment plan with the IRS that does not pay the full amount of the tax debt. If you comply with all of the terms of the plan, the IRS will forgive the unpaid balance of your tax debt. 4. Uncollectable Status (Code 530) Uncollectable status stops collection action but it will not resolve your tax debt. Being in uncollectable status simply means that the IRS has determined that you have no property or income from which it can collect your back taxes. The IRS codes your computer account as Code 530, which translates to uncollectable. If the IRS later finds that you have property or income that can be used to pay your debt, the IRS will start collection action again and remove the Code 530. The IRS is supposed to review your account every six months to determine if your financial condition has improved. Quick Facts on Uncollectable Status: Collection action stops once IRS determines you are uncollectable Page 2
Informal request to IRS usually made to the IRS revenue officer assigned to your account or the IRS automated collection unit handling your account Requires full financial disclosure Where to Find More Information on Uncollectable Status: 5. Innocent Spouse Relief Is the IRS levying your bank account or garnishing your wages because your ex- spouse failed to report income or clamed a false deduction on your joint tax return? If so, you may be eligible for innocent spouse relief. There are three type of relief available: (1) innocent spouse relief; (2) splitting the liability; and (3) equitable relief. Innocent spouse relief will relieve you of the responsibility of paying a joint tax, interest, and penalty resulting from your spouse s understatement of tax. To qualify for this relief you must: have filed a joint return show that did not know about the understatement of tax show that it would be unfair to hold you responsible for the joint tax not have transferred property to or from your spouse or another person as part of a fraudulent scheme to avoid paying taxes Claims for innocent spouse relief must be filed within 2 years after the IRS starts taking collection action against you. This generally means you must make a claim within 2 years after receiving a Final Notice of Intent to Levy or are notified of the filing of a Notice of Federal Tax Lien. Moreover, innocent spouse relief is only available for a tax debt arising from underreporting tax on a return. It is not available for joint taxes that were reported correctly but not paid. Joint tax debt can also be allocated between spouses if you filed a joint return, you and your spouse are divorced or legally separated, and you have not transferred assets as part of a scheme to evade tax. If you qualify the IRS will split you and your spouse s income and deductions. You will only be responsible for the tax on your income. Page 3
Equitable relief from a joint tax debt is available for a tax debt arising from either misreporting on a tax return or not paying a properly reported tax. To qualify for this relief you must: have filed a joint return not be eligible for innocent spouse relief or splitting the joint debt show that you did not engage in a scheme to evade tax show that you did not file your return with the intent to commit fraud not have paid the tax There is no longer a time limit on when you can file a claim for equitable relief. Quick Facts on Innocent Spouse Relief Three types: innocent spouse relief, splitting the tax, equitable relief 2 year time limit for claiming innocent spoue relief or splitting the tax Form 8857, application for innocent spouse relief Where to Find More Information on Innocent Spouse Relief http://www.irs.gov/individuals/innocent- Spouse- Relief IRS Publication 971 6. Penalty Abatement Surprised at how quickly the IRS penalties add up? Would it make a difference if the IRS just forgave the penalties owned on the debt? It probably would. If you have a good reason for not paying your taxes timely or not filing a return timely, the IRS may forgive those penalties. A first time penalty waiver is available for one tax period if you have timely made all tax filings and payments for the last three years. This is a one- time waiver available regardless of why you failed to timely pay your tax or file your return. Otherwise, to qualify for penalty relief, you must prove your late filing or late payment was due to a reasonable cause and not your willful neglect. Quick Facts on Penalty Abatement Form 843, request for penalty abatement Where to Find More Information on Penalty Abatement Page 4
7. Bankruptcy Bankruptcy is the most drastic action you can take to get rid of your tax debts. Unlike the other methods outlined above, bankruptcy affects every aspect of your financial life. Bankruptcy also may not be a viable option because only certain types of older taxes are dischargeable in bankruptcy. You can discharge taxes in bankruptcy that became due 3 years before filing for bankruptcy so long as it has been two years since you filed the tax return and 240 days since the tax was assessed. Trust fund recovery penalties are not dischargeable in bankruptcy neither are any taxes you tried to defeat or evade. If your tax debts are dischargeable in bankruptcy you may either be able to have them wiped out or enter into a payment plan through the bankruptcy process and, then, discharged. Find more information on discharging tax debts at Matt s blog: www.mvstax.com. WHAT TO LEARN MORE? About Matt Matt is a tax attorney and a CPA. Before entering private practice, the IRS was Matt s client. He served as a trial attorney in the Tax Division at the U.S. Department of Justice where he represented the IRS in federal district courts and bankruptcy courts throughout the country. He brings his unique experience to help taxpayers resolve and manage their tax debts. Matt is an attorney at Wharton Aldhizer & Weaver, PLC. Visit Matt Von Schuch s website and blog to find more information about IRS collection issues and how you can start solving your tax problem today. www.mvstax.com or call him for an initial consultation at (540) 438-5344 To learn more about Wharton Aldhizer & Weaver, PLC, visit its website at www.wawlaw.com Legal Disclaimer This article is for general information only. This information should not be construed as legal advice. If you have questions about your specific situation, consult a tax professional. Simply reading or receiving this article does not make me your lawyer. I am sure you are a nice person and I am happy to set up a consultation with you, but I am not you lawyer unless you have a signed engagement letter in hand. Page 5