There are three basic options that you can use in dealing with the IRS Collections Division:
- Payment Plans – You agree to make regular payments against your debt and the IRS agrees to not bug you too much.
- Offer-in-Compromise – You make an offer to clear the debt for less than the face value of the amount owed.
- Uncollectable Status – You show that your financial situation is such that you can’t make any immediate payments.
Payment Plans
There are several forms of automatically approved plans. If you qualify, all you do is fill out a form on the IRS website and start making payments – no fuss, no bother. Not everybody can fit under one of these automatic plans and as a result they will have to submit financial information to the IRS and negotiate a payment amount.
Offer-in-Compromise
This is the pennies on the dollar approach that you hear about on TV ads. What the ads don’t mention is that the IRS has no incentive to accept such an offer. Afterall, they have better legal tools to collect from debtors than private industry and they can afford to wait too see what the taxpayer might earn in the future. The fact of the matter is that the majority of offers are rejected by the IRS.
The IRS does except some offers – those that it determines are in its best interest. They do this using a formula approach that looks at the taxpayer’s current assets and potential future income. If the offer is more than the formula result, it is likely to be accepted provided the taxpayer has filed all tax returns that are due.
Uncollectable Status
The IRS does not want to waste their time if the situation is such that no amount of investigative work coupled with browbeating and threats of levy will result in cash collected. Once they determine that a taxpayer fits into that category, they mark the case as uncollectible and plan to revisit the situation every couple of years. This is great news for the taxpayer in that the IRS leaves them alone for a while and the 10-year Statute of Limitations continues to run.
What to do if you can’t pay the Taxes
If you can qualify for one of the Automatic Payment Plans and can live with the payment amount, then this is obviously your best option. The IRS leaves you alone as long as the payments are being made.
The road on the all the other options is a lot harder and you should consider professional help. You will have to submit detailed financial information about what you own and your income and living costs to the IRS. Included in this package of financial information are bank statements and other documents to substantiate your financial position. The IRS will then run your numbers through their formula and determine the amount of money that is the “Reasonable Collection Potential” to evaluate how much you can pay.
The Reasonable Collection Potential formula is not a secret. There is software available that allows a practitioner like me to run the numbers and calculate the amount that the IRS is likely to consider reasonable in advance. Once we know this amount, we can develop a strategy to decide which is the best option to consider – payment plan, offer-in-compromise, or uncollectible status.
If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.
