With the passing of the April 15th tax filing deadline, many taxpayers are faced with new tax liabilities and looking for answers on how to address them. Fortunately, there are many different repayment options available for tax liabilities. The qualification requirements for many of these options are largely dependent on the type of taxpayer and the amount of tax owed. In certain circumstances, when the liabilities exceed $100,000, it is advisable to retain an experienced tax attorney to assist in reviewing the underlying liabilities and tailoring a repayment for the significant tax liabilities. However, if the liabilities are personal income taxes and you owe less than $100,000 (and you do not contest the accuracy of the underlying liabilities), you can likely effectuate a repayment plan on your own through the IRS website or with the IRS’s Automated Collection Service.
Importantly, the IRS will generally be able to collect the tax liability for ten (10) years from the date the liability was assessed. This is a long time. But, generally, after the ten (10) year period, the tax liability is extinguished and no longer enforceable/collectible.
FIRST CONSIDERATION: PENALTY ABATEMENT
Before setting up any repayment plan (regardless of the amount owed), it is important consider whether you qualify for an abatement of any of the delinquency penalties that have been imposed. The IRS is authorized to assess late filing and payment penalties that can equal almost 50% of the tax due. Further, interest will accrue on these penalties. Relief from the delinquency penalties can significantly decrease the amount owed. A quick way to obtain relief is through the IRS’s first time penalty abatement program that provides for automatic penalty abatement if the taxpayer has not been previously assessed (in the last three tax years) with delinquency penalties. It is advisable that the penalty abatement be explored before entering into a payment arrangement. All penalty abatement requests under the First Time Penalty Abatement must be made by telephone to the IRS’s Automated Collection Service (1-800-829-3903).
HOW MUCH DO YOU OWE?
Once the penalties have been addressed, the best fitting repayment arrangement is dependent on the amount of taxed owed. If you owe the IRS less than $25,000 and do not contest the underlying liabilities, you automatically qualify for a streamlined installment agreement. Under the streamlined installment agreement, taxpayers will have up to 72 months to full pay the outstanding liability and the IRS will not file a federal tax lien so long as the agreement is requested prior to a lien determination. This is the quickest and easiest repayment arrangement. Further, the IRS website now permits installment agreement requests to be made directly through the website.
If you owe more than $25,000, but less than $50,000, you still qualify for a streamlined installment agreement, however the agreement must be set up as a direct debit agreement. Specifically, under the terms of the agreement, you will have 72 months to full pay the outstanding balance due. The IRS may require some minimal financial information to verify your ability to pay the monthly installment agreement (the IRS is currently testing new criteria under the streamlined installment agreement that would not require this collection information). Further, if you agree to a direct debit or payroll deduction, the IRS will also agree not to file a federal tax lien for assessed balances of $25,001 to $50,000.
OFFER IN COMPROMISE OPTION
In addition to the penalty abatement requests and installment agreements, the IRS also has the Offer in Compromise program. The Offer in Compromise program is the only way the IRS will agree to accept payment of something less than what is owed. The Offer program is set up to require the taxpayer to provide a written “offer” to pay the IRS a sum of money. IRS will look to determine whether the offered amount meets what the IRS considers to be the taxpayers’ “reasonable collection potential.” Reasonable collection potential is the sum of the taxpayer’s future income earning potential and the liquidation value of assets. The IRS website has the Offer in Compromise toolkit that does a good job at estimating the ‘reasonable collection potential’. It is important to note that the Offer in Compromise program may not be an option for taxpayer’s with assets that have equity in excess of the taxes due or who have high income earning potential.
WHEN DO YOU NEED A TAX ATTORNEY?
For individuals with balances in excess of $100,000 and no ability to full pay, it is advisable that the individual retain a competent tax attorney (like the attorneys at Terrence A. Grady & Associates) to assist in tailoring a repayment plan that meet their financial situation and objectives. An experienced tax attorney can evaluate the ability to reduce the balance due through penalty abatement and/or IRS’s Offer in Compromise program. An experienced attorney can also investigate the viability of bankruptcy or partial pay installment agreements as available repayment options.