For the majority of Americans, tax season is done and gone. The return has been filed, the refund received, and all the paperwork tucked away securely in cloud storage.
But for several million people each year, the annual dance with the IRS is not yet finished. These are the folks that owe Uncle Sam money.
If that’s you, don’t fret: It’s not the end of the world, and you have options.
When a tax debt client hires us to represent them, we start with two important steps:
- Detailed research into the status of their IRS accounts.
- In-depth analysis of their financial situation to determine the best options to address the debt.
It is this latter component that largely determines what IRS programs you’re eligible for to resolve the tax liability. Let’s discuss those options and who qualifies.
The IRS understands the old adage about not being able to squeeze blood from a turnip. If the analysis of your financial condition indicates that you’re genuinely broke and can’t pay the IRS anything, then they’ll determine the debt to be non-collectible and let you go about your life without further action against you.
There is a pretty significant caveat to this, of course, which is that the IRS’s definition of “broke” and your definition of “broke” may not quite be the same (actually, it never really is).
If you have financial assets that are available to pay off – or even just pay down – the tax debt, the IRS is going to demand that you do so. If you don’t make such payment, well, then they’ll just take it from you in the form of enforcement action called a levy.
For example, if you owe the IRS $50,000, but you have $100,000 worth of Netflix stock, the IRS is going to demand that you sell $50,000 of stock to pay the tax bill even if you have to sell the stock at a loss. If you choose not to sell the stock, the IRS will send a legal notice to your stock broker instructing them to sell the stock and send the money to the IRS, which the brokerage company is legally obligated to do. Not an ideal situation.
On the other hand, if you have very little in the way of financial assets, and your income is less than the threshold set by the IRS for supporting your family, then non-collectible status could be in your future.
This special status is technically limited to one year at a time, but as a practical matter, the IRS simply doesn’t have the staff that would be required to conduct the annual reviews on the millions of people that are in non-collectible status at any given time. As such, it’s possible to stay in this status until the statute of limitations expires on the tax debt, and then poof! – the debt is gone.
That’s right: After the 10-year statute of limitations expires, the tax debt is gone. Wiped out. Eliminated. Flushed.
Under this plan, it’s possible to never pay a single dime of the tax debt. Qualification is obviously difficult, but for the small number of people eligible, this program can be a lifesaver.
If you don’t have the money to pay off the tax debt in full, the IRS will ask you to pay whatever you can to reduce the debt. Then, with whatever is left, they will accept monthly payments to pay off the liability.
Obviously, nobody wants to be making monthly payments to the IRS. But the reality is that the vast majority of tax debtors end up doing so. In fact, approximately ¾ of all tax liabilities are resolved via a payment plan.
Given this reality, what then starts to matter most is:
- How much the monthly payment is.
- How long you’re going to be paying it.
Since the IRS continues to assess penalties and interest on unpaid balances even while you’re in a payment plan, it’s generally advisable to keep the payback period as short as possible. It’s best to think of it as taking out a loan from your Uncle Sam. With all loans, the shorter the term of the loan, the lower the overall cost of borrowing becomes.
The IRS does impose certain restrictions on how long you can take to pay off the liability. This is generally based on the type of tax, such as personal income tax versus payroll taxes, and the total amount that you owe. The more you owe, the longer they’ll generally let you take to pay it off, but also the greater scrutiny they give to the “loan application.”
The one absolute in regard to the term of the payment plan is the statute of limitations mentioned earlier. By law, the IRS is not allowed to collect payments past that statutory period, so the IRS really wants payments big enough each month to fully pay the debt, plus all the penalties and interest, within that 10-year window.
If your financial situation simply doesn’t leave enough room in your monthly budget to make that big of a payment, then the IRS will collect what they can from you until the statute of limitations runs out. If this would still leave a balance due, the IRS will write off what’s left, but they’re also going to put your finances under the microscope pretty intensely before letting you set up this kind of payment plan.
Offer in Compromise
Since less than 20,000 people even qualify for this program every year, I’m not going to say much about it. This is the program that you most commonly hear mentioned on slick TV and radio commercials – the infamous “pennies on the dollar” settlements.
While this program does exist, it’s incredibly difficult to qualify for. That financial microscope mentioned a moment ago? That’s going to apply here.
In short, this program can be a good option for people that have some money they can apply towards the debt but don’t have enough income to make monthly payments for 10 years. For example, if you owe the IRS $50,000, happen to have $10,000 in cash but no other assets, and have been unemployed for two years, the IRS may be willing to accept most of that cash as payment in full.
This wipes out the debt for a fraction of what you owed, thus putting it behind you for good and letting you move on with your life.
While over 90% of tax debts will be addressed via one of these options, there are obviously exceptions. If you have significant assets, multiple properties or businesses, or other complex financial circumstances, your tax debt may require a more creative solution.
Whether complex or commonplace, there is an option for every tax debt. We just need to find the option that is right for you. Let’s get together to discuss your case and see what options are available for you. Schedule a time to chat here:
We’re here to find the best solution to your specific tax problem, even if that means getting creative with a solution.