If you or your business are in the unfortunate position of having an outstanding tax liability, you may be acutely aware of the resulting stress, anxiety, and in some cases downright fear and panic that the most powerful collection entity (IRS) in the nation can instill. While my comforting words alone may not eliminate these feelings, rest assured that there is a path to greener pastures. In fact, there are tax relief programs that can result in settling your tax debt for a small fraction of the total amount owed. Some taxpayers even qualify for solutions whereby they repay none of their tax liability.
Fear and anxiety can cause many indebted taxpayers to procrastinate or even completely avoid the IRS and its collection attempts. However, this will almost always just make the situation worse. Rather than putting your proverbial “head in the sand,” be proactive! Numerous tax relief programs are available that, if chosen correctly, will result in the affordable voluntary resolution of your tax liability. Some of these programs you can take advantage of without professional help, while others work better with the help of an experienced tax professional.
Below, I will highlight some of the most popular tax relief programs. I’ll also provide some guidance as to whether your particular situation can be tackled on your own or whether seeking professional help would be advisable. Simply knowing what programs are available can help alleviate the stress and anxiety that you may be feeling. Determining which tax relief program is best for you is the first step to eliminating the IRS’s (or state taxing authority’s) dark cloud.
Tax Lien Avoidance or Removal
The IRS files federal tax liens, which attach to all assets, when an outstanding tax liability has been assessed and the taxpayer fails to resolve the tax debt quickly. The purpose of a tax lien is to secure the government’s interest in your property. It is a public record, and it may limit your ability to get credit. It can also interfere with or complicate your ability to sell assets that are subject to the lien. Once a federal tax lien attaches to an asset, the lien must be satisfied, discharged, withdrawn and/or released before the asset becomes free and clear.
Note that a lien is not the same as a levy. A lien is a claim against your property. A levy is when the government actually takes property to satisfy a tax debt. You may be at risk of a levy if you have yet to resolve your tax debt, so don’t procrastinate!
While not yet officially codified by statute, in practice, the IRS has made an effort to provide some relief to struggling taxpayers during difficult economic times. Somewhat recently, the IRS increased the threshold dollar amount for an outstanding individual tax liability that will require a federal tax lien to be filed. The dollar amount has gradually increased several times. This increased threshold has dramatically reduced the number of federal tax liens filed. As a result, fewer taxpayers will experience the negative ramifications of having an outstanding federal tax lien filed.
The most common means of securing tax relief from a federal tax lien is to get it released once the liability that resulted in the tax lien has been paid in full. In a concerted effort to expedite this process, the IRS has gradually eliminated much of the previously codified internal bureaucratic rules and regulations thereby allowing lien releases to be accelerated once an outstanding tax debt has been paid in full.
However, there are tax relief programs available to some taxpayers that can result in avoiding a tax lien altogether even though the taxpayer does not full pay the underlying tax liability. One such method is to secure a Direct Debit Installment Agreement and then make several monthly payments to reduce the outstanding liability below the IRS threshold as previously mentioned.
A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due. Certain Direct Debit Installment Agreements (see above) can result in the withdrawal of a Notice of Federal Tax Lien prior to full payment of the tax liability.
Taxpayers may also file Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Aside from the Direct Debit Installment Agreement method, convincing the IRS to withdraw a legally filed Notice of Federal Tax Lien is difficult. Consequently, I strongly recommend that you consult with a competent tax relief professional if you wish to explore the possibility of getting a Notice of Federal Tax Lien withdrawn prior to full payment of the tax debt.
Briefly, there are also methods that may be effective in allowing a taxpayer to secure financing or to sell a tax lien encumbered asset short of a full withdrawal of the tax lien. A tax lien subordination and a Certificate of Discharge of Federal Tax Lien are two such methods.
IRS Installment Agreement
An Installment Agreement is simply a monthly payment plan to resolve an outstanding tax liability. While the IRS prefers full payment or as much money as quickly as possible to resolve the liability as soon as possible, the IRS is aware that expediting resolution through larger payments is not always obtainable. Accordingly, the IRS will consider an Installment Agreement with more affordable monthly payments as a means of tax relief. The reason a payment agreement is considered tax relief is because, once approved, the taxpayer will be relieved from the threat of enforced collections. The exception to this is that any overpayment on a future tax return will be held by the IRS and then applied to the existing liability.
One form of Installment Agreement is the Direct Debit Installment Agreement. IRS internal studies have shown them to be more efficient and less costly to the IRS than having the taxpayer manually remit monthly payments. Moreover, directly debited payments were found to reduce the potential of a default of an Installment Agreement as the payments are automatic, thereby reducing human error in accidently forgetting to make the agreed upon payment by the agreed upon due date.
There are some preconditions that must be satisfied in order to qualify for any Installment Agreement. These primarily include being in complete tax compliance with all required payments (i.e. quarterly estimated payments or federal tax deposits) and having all required returns filed and processed. While there is some wiggle room with regards to quarterly estimated payments provided that the taxpayer can demonstrate that they will not have an outstanding tax liability on the next return due, complete tax compliance has always been and, more likely than not, will always continue to be a prerequisite toward securing voluntary relief of a federal tax liability.
For an Installment Agreement to be an effective tax relief program for the taxpayer, the monthly payments must be affordable. Securing affordable monthly installment payments can be a lot more difficult than it sounds, especially for larger tax liabilities.
If the IRS requires full financial disclosure (which they do require on large tax debts), there is a panoply of problems that can prevent the IRS from approving affordable monthly payments. For example, if there is equity in assets, the IRS might require the taxpayer to sell or borrow against those assets and use the proceeds to pay down or pay off the tax debt. Another very common problem is that the IRS will disallow various expenses, thereby requiring a monthly payment that the taxpayer cannot afford.
For business tax liabilities in excess of $25,000 and individual tax liabilities in excess of $50,000, I strongly recommend consulting with a competent tax relief professional before attempting to tackle the problem on your own. There are just too many disaster stories of people who have felt forced to agree to monthly payments that they could not afford. The result is very often default, which can lead to aggressive enforced collections and a reluctance from the IRS to grant another installment agreement.
PARTIAL PAYMENT INSTALLMENT AGREEMENT
A Partial Payment Installment Agreement is another form of tax relief that is quite similar to that of a standard Installment Agreement with one key difference. A standard payment agreement has monthly payments that will ultimately resolve the outstanding tax liability in full within the IRS’s statutory period of collections, which is typically 10 years from the date of assessment. While there are several actions that a taxpayer can take that will extend the statutory period of collections (filing bankruptcy, filing an appeal, submitting any formal resolution proposal that places a hold on collections (to name a few), for the most part, the IRS has 10 years to collect the liability and so they prefer to only approve standard payment agreements that will accomplish this objective.
Consequently, it takes a lot more work and persuasion to convince the IRS to accept a Partial Payment Installment Agreement. Full financial disclosure is required, and the same obstacles I mentioned in the last section (equity in assets, disallowed expenses) come into play.
Partial Payment Installment Agreements (“PPIA”) have a couple of massive benefits that an make the extra effort well worth it. First, they can result in extremely small monthly payments that are miniscule in relation to the size of the tax liability. Second, it is possible to repay much less than the actual balance due and eventually have the remainder of the debt effectively “forgiven”—if the liability remains in a PPIA for the remainder of the collection statute. Note that after a PPIA is approved, the IRS will periodically require financial disclosure from the taxpayer with an eye towards increasing the monthly payments if the taxpayer’s financial circumstances change.
I recommend consulting with an experienced tax relief professional if you are contemplating a PPIA for several reasons. First, a competent tax relief pro can help determine whether you qualify for a PPIA. Second, a good tax relief pro can greatly improve your chances of getting a PPIA approved for the lowest monthly payment allowable by law. Third, many PPIA candidates are also good Offer in Compromise (“OIC”) candidates. Choosing wrongly between PPIA and OIC can have huge implications, sometimes meaning the difference of repaying every penny of tax, penalty and interest instead of only repaying a small fraction of the total amount due. This can easily mean repaying tens (or even hundreds) of thousands of dollars more than you otherwise would have.
Currently Not Collectible
Currently Not Collectible Status (“CNC”) is yet another form of tax relief. This form of tax relief is even more difficult to secure than that of a standard or even partial payment agreement as it requires a similar financial analysis but goes one critical step further in demonstrating that the taxpayer currently has no ability to remit any monthly payments toward the outstanding tax liability, while satisfying their personal necessary household living expenses or required business operating expenses. Again, just like with a Partial Payment Installment Agreement, this tax relief program is temporary and is periodically subject to financial review with the hopes that the taxpayer’s financial situation will improve thereby allowing them to commence making monthly payments toward the liability. CNC also requires full financial disclosure. Consult with a good tax relief pro for the same reasons discussed above.
Offer in Compromise
An Offer in Compromise (“OIC”) is a tax relief program whereby the IRS (or state) agrees to settle the tax debt for less than the full amount owed. There are three subcategories for Offer in Compromises with the IRS. These categories are doubt as to liability (settling because there is some doubt as to whether the taxes should even be owed), doubt as to collectability (settling because it is doubtful that the IRS will be able to collect payment in full), and effective tax administration (typically a hardship type of settlement). The vast majority of Offers in Compromise that are prepared and submitted to the IRS fall into the doubt as to collectible category.
An Offer in Compromise based on doubt as to collectability is a much different form of tax relief than that of the variations of payment agreements just discussed. It provides a means of settling an outstanding IRS tax liability for less than the full amount. Once approved, an Offer in Compromise is not subject for any review as it is a contractual agreement for tax relief.
This tax relief program becomes a viable option when it can be thoroughly demonstrated with supporting financial documentation that paying the liability in full within the remaining collection statute, even by way of monthly payments, is simply not possible or that it will create a severe financial hardship to the taxpayer. The IRS will consider approval of an Offer in Compromise when the taxpayer can prove that after taking into consideration net monthly income and equity in assets, that the offered amount is the IRS’s best reasonable collection potential.
Whereas an OIC settles a tax debt for less than the full amount permanently (as long as the taxpayer doesn’t default), securing approval of an Offer in Compromise is typically the most complicated and difficult of the available tax relief programs to get approved. A very large percentage of OIC’s that are submitted wind up getting rejected. On the other hand, OIC’s that get accepted can be nothing short of life-changing. For these reasons, having an experienced and knowledgeable tax relief professional on your side is critically important. A good pro can help you avoid wasting time by submitting an OIC that is destined for rejection. They can also make the difference between rejection and acceptance. Professional representation can also result in a settlement that is tens of thousands of dollars lower than a settlement negotiated without professional help.
IRS tax penalty abatement
By statute, the IRS assesses penalties to encourage voluntary compliance of the Internal Revenue Code. Voluntary compliance primarily consists of preparing an accurate return, filing it timely, and then paying any tax due by the due date. Consequently, when voluntary compliance is not done, the most common penalties that the IRS will assess are for late filing and late or nonpayment of taxes.
While IRS penalties can accumulate at a ridiculous rate, do not be quick to despair. Many taxpayers qualify for some form of tax relief in the form of a penalty abatement (elimination of some or all penalties).
The IRS has four general categories in which penalty relief will be considered. These categories include reasonable cause, statutory exceptions, administrative waivers, and correction of an IRS error. The most prevalent basis for the abatement of penalties is reasonable cause for late flings and late or nonpayment of taxes. Reasonable cause relief is generally granted when it can be proven that the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations due to circumstances outside of their control.
Securing a penalty abatement on the basis of reasonable cause requires the taxpayer to draft a compelling written request that proves to the IRS that the nonpayment of taxes was the result of reasonable cause. To maximize the chances of approval, one must present their specific factual scenario of what occurred in a manner that is favorable to the taxpayer, while identifying and applying the correct laws, statutes, and IRS policies that are applicable to the factual scenario at hand. Due to the subjective nature of this form of tax relief, it is always beneficial to provide as much documentation as possible to support the establishment of reasonable cause. Since the preparation of a compelling penalty abatement request is quite similar to the preparation of a legal brief, I believe that tax attorneys (who have training and experience in persuasive legal writing) are far better suited at securing penalty abatements than individuals or even other tax professionals, such as CPA’s or Enrolled Agents.
In addition to the above, there are other, lesser-known tax relief programs that can benefit taxpayers with very specific types of situations. If you have a significant tax liability, your best bet is to first consult with an experienced tax relief professional and find out what tax relief programs might be available to you. Fortress Tax Relief has caring and knowledgeable tax professionals on staff who can answer questions that you might have and outline a solution specific to your circumstances. There is no cost for a consultation, so pick up the phone and call us today!
Can I negotiate with the IRS myself?
The short answer is yes, you can negotiate with the IRS yourself. This does not necessarily mean that doing so is a good idea. The tax collection laws and procedures are numerous and complex. The IRS knows these laws and procedures inside and out. You probably do not. This is why one of your most fundamental rights as a taxpayer is the right to be represented by a professional who is authorized to practice before the IRS.
How do I get my IRS debt forgiven?
You get your IRS tax debt forgiven if you qualify for one of their forgiveness programs or if you manage to survive the collection statute of limitations (typically 10 years). A common way to have much of your tax debt forgiven is to negotiate an Offer in Compromise. It is advisable to have a professional negotiate your offer. Most do-it-yourself taxpayers will either have their offer rejected or they will leave money on the table and wind up paying far more than they are required to by law.
Does IRS forgive debt after 10 years?
The IRS “forgives” a tax debt after the collection statute of limitation expires—typically 10 years after the date the tax was assessed. The statute of limitation can be extended beyond 10 years for a number of reasons, such as filing bankruptcy, filing certain types of tax appeals, and filing an Offer in Compromise. Portions of a tax debt can also effectively be “forgiven” by reaching a tax settlement (Offer in Compromise) or having penalties abated.
What is the minimum payment the IRS will accept?
There is no minimum payment the IRS will accept, and you may send in voluntary payments towards your tax debt in any amount you want. However, your tax liability will not be considered “resolved” unless you either full pay the amount due or enter into an agreement with the IRS, such as an installment agreement. Until you “resolve” your tax debt, you are at risk of enforced collections such as bank levies, wage garnishments, and asset seizures.
How can I get IRS penalty waived?
Getting IRS penalties waived includes a process called penalty abatement. You must show “reasonable cause criteria” for the release of penalty. We often talk to people who tell us they have no good reason for accruing a tax debt. These people would have no chance of getting penalties waived. However, the well-trained professionals at FTR are capable of spotting criteria you may think is insignificant and in turn provide you with penalty reductions you may have missed.