How to Resolve Your Income Tax Debt

On Tuesday, I covered the importance of filing your income tax return on time to avoid the failure-to-file penalty. This could mean filing a return on which you owe but can’t afford to pay the balance.

If you find yourself with income tax debt, take solace in knowing that you aren’t alone. An estimated 17% of the population doesn’t or can’t comply with their tax obligations. I deal with people on a daily basis that owe the IRS as little as $10,000 to some that owe over $1,000,000.

Today I want to discuss three solutions that can help you deal with your debt.

Installment Agreements

The first approach involves paying the IRS in installments. Under the IRS’ Fresh Start initiative, individual taxpayers that owe under $50,000 can easily set up a payment plan, if the taxpayer pays his or her debt in full within 72 months (6 years).  You can request the agreement online or mail in Form 9465 to a service center. Keep in mind that it may take a while for an installment agreement requested through the mail to be set up, as the service centers are really behind.

If you need longer the 72 months to pay your debt or you owe over $50,000 the IRS will request a Collection Information Statement (Form 433-A or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an important role in the other resolutions you may obtain.

Currently-Not-Collectible Status

If your financial statement shows that your expenses outweigh your income and you don’t have assets that can pay your debt in full, then you qualify for Current-Not-Collectible (CNC) status.  In this resolution, you don’t have to pay anything towards your debt, like a student loan forbearance, but interest and penalties continue to accrue while your debt isn’t paid. The IRS may also review your account in a year or two to see if your financial situation has improved enough where you can make monthly payments. However, there are some situations where you could be in that status for the entire period the IRS has to collect the debt – the collection statute expiration date (CSED). The CSED is usually 10 years from the date the tax is assessed barring any extension of the statute.  For more information on CNC, see Internal Revenue Manual 5.16.1.

Offer in Compromise

The last resolution I want to cover is the offer in compromise. With this agreement , you pay the IRS a percentage of what you owe. And once you pay that amount, the rest of your debt is forgiven. This type of resolution is most of attractive because you pay less than you owe and have more finality than you would in something like CNC.

Unfortunately it’s not as easy as calling the IRS and offering whatever you want. You have to fill out a financial statement: this time a 433-A (OIC)). In addition, you have to fill out Form 656, outlining your offer amount and why you think the offer should be accepted. The offer amount is based off of your disposable income and equity in assets. As of late, it has taken a long time to get the offers processed. However, if you think you qualify, it could be a great way to get a fresh start.

These are just three ways to resolve your debt. You can also pursue other options like audit reconsideration, penalty abatement, and innocent/injured spouse. I will cover these resolutions in later posts.

Owing the IRS can be one of the most dangerous kinds of debt to have. In addition, dealing with the different functions of the IRS can be tedious and time consuming. If you are overwhelmed and need guidance, it’s best to contact a tax professional – either a lawyer, CPA, or Enrolled Agent – that is authorized to represent you before the IRS.