Tax resolution programs are extremely important to helping those that are struggling with tax debts. Many people are surprised to find out that you can actually negotiate with the IRS. There are a number of tax resolution programs provided by the IRS that can be monumental in dissolving your tax problem.
Offer in compromise
The offer in compromise program can actually be one of the best options for removing an IRS debt from your life. The IRS wants you to pay everything they say you owe in full, but they realize they can't get blood from a stone.
Whether you made a mistake with your personal finances, or you couldn’t pay your payroll taxes as you needed the money to keep your business afloat, not everyone is going to have the money available to pay off the debt completely. We highly advise against reaching out to family members to get a loan to pay off the amount in full. The main reason for this – if you need to borrow money to pay back the IRS, then you’re likely a candidate for an offer in compromise (or one of the other programs)!
The amount being offered in an offer in compromise comes from your reasonable collection potential (RCP), which is what the IRS can actually expect to collect from you based on your particular situation. The goal? To find all of the parts of your life that can lower this RCP. When you arrive at your RCP, you can then submit an offer and wait to see if it’s accepted.
What to watch out for when submitting an offer in compromise:
- IRS statistics say that 25% of offers are rejected. This is more than likely because many of these offers are not based in reality and are instead taxpayers trying to get away with paying next-to-nothing. Sometimes tax resolution companies or bad attorneys just file offers and hope that it gets accepted (not to brag, but we have a 99% acceptance rate. We don't file an Offer unless we're sure it's a good idea).
- While an offer is being considered, the clock for the statute of limitations is stopped. We’ll go into more depth on that below when we look at the collection statute expiration date (CSED), so keep it in mind.
- Once an offer has been accepted, you have to remain in compliance for five years. If you run up a new debt or fail to report all necessary forms, your offer is nulled and the full tax debt comes back to haunt you.
- Whenever you submit an offer, you must submit some sort of payment (think of it as a deposit) along with the offer. If the IRS declines your offer, you lose your payment. It can become quite costly if you’re submitting offer after offer.
Partial payment plans
The IRS says, “All taxpayers are expected to immediately full pay delinquent tax liabilities,” but they know that sometimes this just isn’t possible. For those unable to immediately solve their tax debts, one of the tax resolutions to consider is partial payment plans (also known as installment agreements). These agreements, based upon your personal ability to pay, can be a great way to whittle an overwhelming debt down to something manageable.
One of the best things about partial payment plans is that they only take into account what you have left after your monthly living expenses. So, if your living expenses are high (especially if you live in a high-expense area like New York or California), then you can expect your installment agreement to take that into consideration.
The IRS knows that working with you to enter into a partial payment plan is going to work better for them in the long run than forcing you into bankruptcy. If done correctly bankruptcy can completely wipe out an IRS debt, leaving them empty-handed. That’s why they want you to be able to pay them everything you can without sending you spiraling financially. Their best interests are met by letting you continue to earn money that they can claim on a monthly basis.
Additionally, for each month that ticks by during the course of an installment agreement, you get closer and closer to the IRS’s statute of limitations for collections (CSED). Having this knowledge in hand, you can oftentimes negotiate a payment plan that pays away some of your debt, but still leaves the IRS walking away with something in their pockets. After a certain period of time has elapsed, it’s also possible that you might be a prime candidate for an offer in compromise to clear away your debt entirely. This is where the CSED can be an incredible tool for negotiation; if the IRS knows that they are running short on time, they have been known to be significantly more willing to sorting out your debt.
What to watch out for when entering into an installment agreement:
- Without a doubt, most importantly, don’t ever enter into an agreement that you aren’t sure you can keep. Defaulting on an installment agreement gives the IRS cause to go after you in full again and can be the start of your financial ruin. I don’t want to scare anyone, but this is so important. Make sure that you are 100% able to complete all of your monthly payments. If you’re unsure, then it’s likely that the proposed plan requires too much of you and needs to be negotiated down. A partial payment plan is not a way for the IRS to collect the entire debt. Instead, it’s a way for them to collect some of what you owe.
- Be wary of the CSED (which we’ll look at next). Knowing when your tax debt expires gives you a negotiating chip and the possibility for the debt to dissolve entirely.
- You’re going to need to watch your monthly spending. While you may feel that your installment agreement monthly payment is simply too high, it’s possible that your lifestyle may need to be tempered in order to meet the reality of your situation.
CSED
The collection statute expiration date (CSED) is one of my favorite tax resolution programs to tell taxpayers about. The CSED, put simply, means that the IRS can’t follow you forever. Instead, once a debt has been assessed, they only have 10 years to collect. Once those 10 years are up, the tax is gone. Just like that, the IRS is gone from your life. What more could you ask for?
There are some slight complications that can make the CSED not quite the savior it would seem when taken at face value. First, there’s the word "assessed". The expiration date is 10 years from the time that a debt is assessed. This doesn’t mean that 10 years after the debt is incurred (think of the year that a return wasn’t filed or completed properly), but instead 10 years after the IRS knows about the debt.
From the majority of taxpayers, the CSED holds the majority of its value as a bargaining chip. Being able to remind the IRS that they could eventually lose any ability to collect can be a great way to nudge them in the direction of a settlement. Whether it’s working out a reasonable offer in compromise or agreeing on an installment agreement, using the CSED to your benefit can be a game changer.
What to watch out for when leveraging the CSED:
- One of the downsides to the CSED is that it can make the IRS angry. If they are unable to collect, it’s within their rights to place a tax lien against you, which has the potential to dramatically impact your credit.
- The CSED clock (ticking down from 10 years) is only started once a debt has been assessed. If it hasn’t, then the clock is stuck at 10 years indefinitely.
- There are a number of actions that can cause the CSED clock to come to a screeching halt. The most notable of these actions are filing an offer in compromise or leaving the country.
OVDP/Streamlined Procedures
The Offshore Voluntary Disclosure Program (OVDP) is a tax resolution program for people with undisclosed foreign income that want to come forward before the IRS "catches them". The IRS has been targeting a number of international banks, forcing them to give up their U.S. clients. Unfortunately for taxpayers, when the IRS adds one of these banks to its “blacklist,” the U.S. account holders can be subject to a penalty of up to 50% of the account value. To say that the punishment doesn’t fit the crime is an understatement.
There are a number of reporting requirements for those holding foreign financial accounts. For anyone with at least $10,000 in foreign accounts, it’s necessary to file both an FBAR and a Form 8938. Failure to file these forms can lead to hefty penalties and the possibility of criminal charges (if the Department of Justice suspects you willingly avoided reporting). The OVDP, while extensive and still holding some unwelcome penalties (27.5% for up to eight years of unfiled returns), can help remove criminal charges and shows good will towards the IRS as you’re coming forward instead of waiting for them to find you.
Finally, the streamlined procedure – first announced in 2014 – is a version of the OVDP for those with no criminal exposure. It only looks back three years for unfiled returns, instead of the eight required by the full-fledged OVDP. The streamlined is a little less intrusive, takes less compliance paperwork, and the penalties are substantially less (5% if living in the U.S. and 0% for expatriates). The streamlined procedures are also a great option for those that bank with one of the “blacklisted” banks as the main criteria for acceptance is willfulness. If you weren’t purposefully trying to evade reporting on your foreign accounts and income, then this could definitely be the best option for settling your tax debt for a reasonable amount.
What to watch out for with the OVDP/streamlined procedures
- If entering the OVDP, the fines and penalties can be overwhelming. The purpose of the program is to make sure you don’t get hit with an even bigger penalty while making certain that no criminal charges will stick to you. As mentioned, entering the OVDP shows the IRS that you want to put your mistakes behind you and that they don’t have to chase you.
- There is a sizable amount of work to enter into the OVDP and successfully navigate through. You’re 100% going to want to hire a firm you can trust to represent your interests. If there’s any possibility that the IRS could say that you were willful, the streamlined procedures are unlikely to be for you. That, unfortunately, means the full amount of paperwork will be necessary and that the fines will be added to your legal fees. None of this is meant to scare you, but instead to make you aware of the reality of the situation.
Overall, the OVDP and streamlined procedures are in place to get you squared away with the IRS for any foreign income that you failed to report. If your willfulness is not being called into question, the streamlined procedures can be an amazing way to make things right with the IRS while keeping the penalties manageable. However, if there is a chance of criminal exposure, it’s far better to get ahead of the problem. Entering into the full OVDP and making sure that you don’t have the possibility of even higher penalties (especially if you bank with one of the “blacklisted” banks) is the way to keep your penalty standardized while avoiding any criminal charges.
Everything we’ve looked at so far is just scratching the surface of these programs and what they can provide for you. If you're unsure of the best option for you, contact us. We can help you come up with the best strategy for your specific situation. Call us at 888-727-8796 or email info@irsmedic.com.
