With many Americans out of work, or living on reduced income due to the global pandemic, they may no longer be able to pay the IRS if they have outstanding tax liabilities. When an IRS tax debt cannot be paid in full, the IRS provides three alternatives for collecting funds from a taxpayer: (1) Installment Agreement (several versions); (2) Offer in Compromise; or (3) Currently Not Collectible Status.
Under an Installment Agreement, the IRS will agree to accept monthly payments from a taxpayer, generally up to a maximum 10-year period (based on the statute of limitations on collection). In the Offer in Compromise program, the IRS will agree to accept less than the full amount due and owing by a taxpayer, if, and only if, the IRS determines that it cannot collection the amount due from the taxpayer. Currently Not Collectible status is offered to taxpayers with no net realizable equity in assets, and no income from which to pay the IRS.
To determine which of these collection alternatives a taxpayer qualifies for, the IRS performs a financial analysis (with the exception of some types of Installment Agreements). It analyzes a taxpayer’s net realizable equity assets and monthly income and expenses to see how much the IRS could collect if it were to exercise all of its collection powers—Federal Tax Liens, Levy, Seizure and Sale.
Because of unfavorable economic conditions from the Covid-19 outbreak, taxpayers may now qualify for programs with the IRS they were previously ineligible for. Many asset values are decreasing and with little or no income, taxpayers should seriously consider determining current eligibility for any of these options.
Importantly, before the IRS will even consider any of the collection alternatives, a taxpayer must be in compliance with filing and payment obligations. This means filing any delinquent tax returns (generally for the last six years), making current estimated tax payments (if applicable) and making federal tax deposits if the taxpayer owns a business. If a taxpayer is not in compliance, then none of these options are available.
If you owe the IRS money, or need help determining your eligibility for a collection alternative, contact Anderson & Jahde for competent, professional tax help.