In an earlier post, I gave an overview over how IRS debt settlement works. In this article, I will go over the IRS debt settlement programs available to you when you agree to what you owe, but still can't afford to pay the debt in full to the IRS.
Can't afford to pay the IRS?
You're in good company. Something like 1,000,000 taxpayers are in the same situation as you, unable to pay their IRS tax debts in full. Because this represents such a huge amount of taxpayers, the IRS and Congress have developed these IRS debt settlement programs when you agree to what you owe the IRS, but can't afford to pay them in full.
Installment Agreement (Full pay)
This type of installment agreement will pay back the IRS in full within the remaining collection period (Click here to learn what the IRS collection period is). There is a streamlined Installment Agreement which doesn't require financial information. For larger installment agreements, the IRS will require full financial information, so that they can collect as much from you as possible
What to watch out for: Nearly anyone can get into an Installment Agreement. But the question is, will this actually settle your tax debt? Is it an amount you can actually afford? If you pay the IRS your installment agreement, what is the chance of you running up a new debt? The last thing you want to do is agree to the IRS' numbers even though you have doubts that you will be able to make every payment. Don't agree to anything just to make the IRS go away. All that will happen is you will increase your tax debt and have to deal with a more aggressive IRS who doesn't like the fact that you defaulted your Installment Agreement (when you run up a new tax debt, it automatically defaults any agreement you have in place with the IRS, even if you are still paying your installment agreement in full).
Partial Payment Installment Agreement (PPIA)
A partial payment installment agreement is an installment agreement that won't pay back your entire tax debt over the remaining collection period. These are a bit tougher to negotiate, and the IRS may only give you a limited amount of time to pay the reduced amount.
What to watch out for: The IRS can revisit your financials to see if an increase in your partial payment installment agreement is warranted. Therefore, you don't have final resolution until the collection period has expired or you paid the debt in full. Any tax lien filed against you, you cannot get withdrawn like you can when you full pay your tax debt.
Currently non-collectible/hardship status
In "CNC" status you pay the IRS nothing each month! All you need to do is make sure you aren't running up new tax debts. Like the partial payment installment agreement, once the collection period expires, the tax debt goes away.
What to watch for: As your IRS tax debt gets closer to being wiped out by the passage of time, the IRS knows this. So like with the Partial payment installment agreement, the IRS may become much more aggressive near the end. If you qualify for a partial payment installment agreement or non-collectible status, changes are you should really investigate whether or not an Offer in Compromise would be the right IRS tax debt program for you as it settles your tax debts quicker.
Offer in Compromise
With an Offer in Compromise, you pay the IRS an amount lower than what you owe. Why would the IRS accept less? Because you demonstrated that your ability to pay — after taking into account all necessary personal and business expenses — is as low as possible.
What to look out for: Do not low-ball the IRS, you won't be taken seriously. Do not give the IRS a 20% down payment (there is a better way to do this). Here is a big one: You must be a good taxpayer for then next 5 years after an Offer in Compromise is accepted or all of your tax debts will come back.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy can completely discharge old personal tax debts.100%.
What to watch out for: Timing is big. Be sure to calculate the correct time to file bankruptcy. My friend, Attorney Larry Hienkel of Tampa, FL has developed the bankruptcy tax discharge determinator to help bankruptcy attorneys calculate the right time to file bankruptcy. Chapter 13 is available, but I have yet to see a repayment plan that was more favorable than something we could have negotiated with the IRS. The other thing is tax liens. If there is one area of law more confusing is what happens to a tax lien when Chapter 7 is filed? I have seen cases where they have been released and where they haven't. It mainly depends on if we are successful in convincing the IRS insolvency unit that there is no equity the liens secure (but not always).
You can not get rid of Trust Fund taxes with bankruptcy (although you can lower them with an Offer in Compromise).
For when you dispute the amount you owe
The are other IRS debt settlement programs available if you dispute the amount you owe the IRS. These include penalty abatement, audit reconsideration, amended returns, innocent/injured spouse relief, and Claim for Refunds. Just to make it clear, these are your options when you can't afford to repay the IRS.
Conclusion: IRS debt settlement programs "Why can't I just do this on my own?"
One question we deal with all the time when we speak with someone who wants to know if they can save money and represent themselves in front of the IRS (or gamble on a a low-cost resolution company) is: "Why can't I just do it on my own?" Well, you can do it on your own. You can even represent yourself in a trial. But the question is, should you face the IRS unprotected?
To help you answer that question, I'll give one simple example: we have had many IRS employees hire us to handle their tax debts. If IRS employees need protection from the IRS, shouldn't you get protection from the IRS?
If you're unsure how much you owe, or when your tax debt is going to expire, the best option for you is our Total Tax Diagnosis Report. Learn more about it here. If you prefer to schedule a free consultation with us, contact us here.
