Two of the most common payment options for delinquent tax debts are installment agreements and offers in compromise. Let’s discuss theses options below, along with the key considerations for choosing which route might be best in a taxpayer’s particular case. If you owe the IRS, and are considering how to pay off the debt, contact The Wilson Firm. We have both the experience and expertise to make the right decision.
IRS Installment Agreement:
An installment agreement allows taxpayers the opportunity to pay their debts in smaller, more manageable amounts. Installment agreements typically consist of equal monthly payments. The number of monthly installments and the amount to be paid is based on the total amount owed by the taxpayer and the taxpayer’s ability to pay.
Although installment agreements are not limited to a certain dollar amount, if you are an individual, owe less than $50,000 and can afford to repay the balance (plus interest and penalties) within six years, you may qualify for a Streamlined Installment Agreement. One of the major benefits of the Streamlined Installment Agreement is the IRS will usually approve the installment agreement without any questions or need for extensive supporting documentation verifying income, expenses, and the like.
If the taxpayer in question is a business that owes income or payroll taxes, the Streamlined Installment Agreement is still an option; however, there is also the option of creating an In-Business Trust Fund Express Installment Agreement. An In-Business Trust Fund Express Installment Agreement is available to small businesses that may owe delinquent payroll taxes (Forms 940, 941, or 943) and still have employees. The amount of payroll taxes owed must be $25,000 or less. Accordingly, the business must agree to monthly payments sufficient to pay the full liability within 24 months or by the end of the period that the IRS has to collect the debt, the Collection Statute Expiration Date, whichever is earlier. Typically, if a business qualifies for this type of payment plan, it will not have to provide any financial information to the IRS to receive payment plan approval.
Advantages of a Streamlined Installment Agreement:
- No need to disclose financial assets – If you do not qualify for a Streamlined Installment Agreement, the IRS may require a financial statement (Forms 433A or 433F) disclosing where you work, where you bank, and what your assets are. However, with a streamlined installment agreement, that’s not required.
- No documentation required – For regular installment agreements, the IRS typically requires personal documents, such as paystubs, bank statements, and verification of living expenses. On the other hand, if you notify the IRS that you are repaying them via a Streamlined Installment Agreement, no documents are necessary.
- Expedited negotiations with the IRS – a Streamlined Installment Agreement can often be made with one phone call to the IRS. With no financial disclosures and no documentation required, you are saving time by going the Streamlined route.
IRS Offer in Compromise:
You may have heard radio or television ads that talk about people mired in tax debts being able to escape by paying “just pennies on the dollar.” Unfortunately, in practice these are more easily marketed than actually obtained. However, they certainly do exist, and certainly are an option in some cases. This option is more formally known as an “Offer in Compromise.” With an Offer in Compromise, the IRS can accept less than the full amount you owe when it is doubtful that the IRS will be able to collect the entire amount due or if collecting the amount due would create an economic hardship. In some cases, the IRS may accept an Offer in Compromise to settle a tax debt, including any penalties and interest. However, the IRS will usually expect you to use all your available assets to pay off the amount you owe. For example, the IRS will often expect you to liquidate any assets you have to come close to the amount owed. For some, they may not want to part with their items or property.
To determine whether you are eligible for an Offer in Compromise, the IRS will consider your unique set of facts and circumstances:
- Ability to pay;
- Expenses; and
- Asset equity.
When the amount offered represents the most that the IRS can expect to collect within a reasonable period of time, the IRS will approve the Offer in Compromise. However, what amount meets that threshold is where taxpayers and the IRS often disagree.
In some cases, the amount the taxpayer can pay under the general analysis applied to Offers in Compromise indicates that the liability can be fully paid, and thus, no Offer in Compromise will be granted. However, in those cases, special circumstances may apply that still allow the taxpayer to obtain an Offer in Compromise despite their financial assets seemingly being sufficient to pay the tax liability in full. Some of these considerations relate to health, age, types of tax at issue and the related bankruptcy laws, as well as the statutes of limitation on the government’s legal right to collect the taxes due.
Importantly, if the IRS rejects your Offer in Compromise, an Installment Agreement can still be requested.
To ensure you are making the best choice in paying off delinquent tax debts, contact The Wilson Firm today.