Options for Tax Collection Problems

By:
Daniel Gibson, CPA, EA
Published Date:
Aug 1, 2015

Tax professionals encounter a myriad of reasons why taxpayers fail to keep up with their tax debts—for example, a sudden business downturn, unexpected catastrophic medical expenditures, or just living a lifestyle that leaves little left for the nuisance of tax payments to the government. This predicament can cause a taxpayer much consternation when the world’s greatest collection machine, the IRS, leaves its calling card. During confrontations with the IRS, taxpayers and their representatives need to deal with the liens and levies that will ensue, and the collection matter must be handled through either an installment agreement or offer in compromise.

Strategies to Avoid IRS Actions

When taxpayers find themselves being hunted by the IRS, the menacing threats of liens and levies must be dealt with; however, there are strategies for avoiding these IRS actions. Keep in mind that these IRS enforcement actions can have a devastating effect on one’s credit rating.

  • Be productive. Quite frankly, this is not a trait found in most delinquent taxpayers, but handling the situation up front can go a long way in avoiding the IRS’ lien and levy action. If the complete amount of tax cannot be paid upon filing a return, taxpayers should file a Form 1127. When asked, the IRS will state that there is no such form, but it does exist. The extension is not automatic; taxpayers will need to provide information demonstrating that they do not have the means to pay the entire amount and that paying that amount would cause a financial hardship. Yet, it is a means to go on the offensive and buy six months to sort things out.

     

  • Manage the balance owed. Normally, if a taxpayer’s balance is less than $10,000, the IRS, as a practical matter, will not file a lien. So, if taxpayers have a balance slightly over this amount, they may want to consider paying down enough of the balance to get it under the $10,000 threshold. If they have a balance up to $50,000 or can pay down the balance to get it under $50,000, they can enter into a streamlined installment agreement. In most cases, these can be set up with very little administrative fuss. In order to avoid a lien filing, taxpayers will need to enter into one of these agreement before the IRS has a chance to file. Again, this requires a certain proactive behavior not often attributed to delinquent taxpayers.

A CDP Hearing: One Last Chance

Once a lien has been filed and a balance remains outstanding, it is nearly impossible to release or withdraw it. With the lien in place, the next step for the IRS is to levy (or take away) a taxpayer’s property. The IRS starts this process by issuing five letters, beginning with a CP14 and then ending with an L1058/LT11. It is a letter campaign that gradually increases the pressure on the taxpayer, with the final letter basically stating, “This is the final notice. The next time you hear from us will be after we clear out your bank account!”

In this final letter, however, the IRS does offer one last olive branch—the Collection Due Process (CDP) hearing. From the date of the final letter, taxpayers have 30 days to request this hearing by way of a Form 12153. If filed in a timely fashion, this will cause all collection actions to cease and give taxpayers time to discuss their situation with a settlement officer within the IRS’s appeals division. This can make a big difference: When dealing with agents in the automated collection system (ACS), the agent’s objective is to collect as much as possible in the shortest amount of time. Unknowing taxpayers who decide to go it alone can easily get stuck with a plan that they can’t manage. On the other hand, a settlement officer at a CDP hearing is trained to settle cases. This does not mean settling cases for pennies on the dollar, but rather reviewing a case to determine the most effective way to have taxpayers pay back their debts to the government without setting them up for failure.

An Overview of Installment Plans

The IRS (particularly agents at the ACS unit) usually wants to figure out how it can get the taxpayer to pay in full as soon as possible; however, with a little persistence—and most likely by handing over financial information via a Form 433—the IRS will eventually give in and accept payment in installments. Several installment plans are available:

Guaranteed. Basically, the IRS is required to accept an installment arrangement from a taxpayer with tax debt (excluding penalties and interest) of $10,000 or less, who can pay the debt in three years, has not entered into a recent installment agreement, has filed prior-year returns, and agrees to stay current going forward. No Form 433 is needed.

Streamlined. There are two streamlined plans:

  • $25,000 or less—Available to taxpayers with a balance due (taxes, penalties, and interest) of $25,000 or less, who can pay the balance within the earlier of the collection statute expiration date or 72 months. No Form 433 is required.
  • $25,000 to $50,000—Similar to the arrangement above, except that some financial information may be needed and the taxpayer must agree to paying installment with a direct debit to a bank account.

Partial payment. If taxpayers can demonstrate, through a Form 433, that they can pay some installment payments, but not enough to cover the debt owed by the collection statute expiration date, the IRS does have the authority to enter into a partial-payment installment agreement (sometimes known as the poor man’s offer-in-compromise because it can be done at a relatively low cost). The downside is the IRS will be checking in every two years and will want taxpayers to refresh the Form 433 to determine if their financial status has changed.

Negotiated. If none of the above work, there’s always the old-fashioned way: the taxpayer will be required to provide a Form 433 and will need to haggle with the IRS about the terms of the installment agreement.

Currently not collectible. If the taxpayer has submitted Form 433 and the IRS makes the judgment that it would be a financial hardship if the taxpayer is forced to pay anything to the IRS, the taxpayer’s account could be placed in the status of “currently not collectible.” This puts a halt to all collection activity, while allowing the time that the IRS has to collect (10 years) to continue to tick away. In return, the IRS requires that taxpayers be compliant with tax filings and tax payments. Plus, it reserves the right to review the taxpayer’s financial condition (via an updated Form 433) periodically.

Offers in Compromise

In doing tax collection work, practitioners and IRS revenue officers must weigh the need for the government to collect the tax against the ability of the taxpayer to pay the tax. Recognizing this, the IRS went through the process of easing the standards for troubled taxpayers in order to allow them to enter into what is known as an “offer-in-compromise” (OIC). This process of easing is known, in part, as the Fresh Start Initiative, which went into effect during 2012.

This OIC program is not for everyone. If the IRS believes that, based on taxpayers’ assets and earning potential, that they can receive a full payment within the time allowed by law (usually 10 years), they will normally reject a submitted OIC application. On the other hand, if there is enough uncertainty in collecting a full payment, the IRS can be persuaded to consider an OIC application. This will allow it to get the most payment in a shorter amount of time—and enable the IRS to clear the taxpayer’s debt from its inventory. Keep in mind that the IRS needs to be convinced that it is in its interest to accept this offer, not that of the taxpayer.

The calculation usually proceeds as follows. The OIC is made up of two components: net equity and net income. Net equity consists of cash plus assets (normally discounted at 20% of their fair market value) less allowable debt. Added to that is net income, which consists of gross income less allowable monthly expenses. Depending upon the method of payment, the net income is then multiplied by 12 or 24 (if the taxpayer wants to pay off the offer in 5 monthly installments or less, the multiplier is 12; if the taxpayer wishes to do it with 6 to 24 monthly installments, the multiplier is 24). Note that prior to 2012, the multipliers were 48 and 60, respectively—a big difference! Add up the two components to determine a taxpayer’s offer amount.

If the IRS believes it is in the government’s interest to collect the amount determined by the offer, it will be accepted. If it is content with chasing the taxpayer for the remainder of the 10-year collection period, it will be rejected. If IRS will not move from this position, it probably makes sense to start talking about the installment options discussed earlier. Only about 50% of the offers submitted are accepted, so taxpayers whose offers are rejected shouldn’t feel bad; they’re in good company.


Daniel Gibson, CPA, EA, is a partner in the New Jersey office EisnerAmper LLP. He has worked in public accounting for 32 years and assists individuals and businesses with resolving tax controversy matters.  Mr. Gibson can be contacted at daniel.gibson@eisneramper.com or 732-243-7303.

 

 
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