Owing past-due taxes can be daunting and intimidating. However, the IRS has procedures in place that can put the delinquent taxes under some control until they can be paid in full. Here are some ways to deal with the unfortunate situation of owing back taxes. (My thanks for assistance with this post to Peter Weitsen, my partner of over 30 years who is very knowledgeable on this topic.)
The first thing to understand is that there are various methods to deal with past due taxes. The easiest way is to request an installment arrangement either when you file your return or separately. These are done using Form 9465, Installment Agreement Request, or via the IRS’s Online Payment Agreement Application. These can stretch the payment period up to 6 years and can be done for liabilities that do not exceed $50,000. There is also currently a Streamlined Installment Agreement that the IRS is testing for balances of up to $100,000. Payment terms can be up to 84 months with the possibility, but not guarantee, that no lien would be filed for amounts exceeding $50,000. The IRS encourages applying for the Streamlined Installment Agreement via their Online Payment Agreement application referred to above.
Regardless of any arrangement, interest and penalties will continue to be assessed, increasing the debt. In some cases, the interest and penalties can be greater than the monthly payments agreed to, but IRS enforcement actions will be suspended while you conform to that agreement, leaving the balance due to be settled in some form at a later time. In those cases, the IRS will periodically review your situation to determine whether the monthly payments can or should be increased.
In cases where the debt is more than $50,000, or if there is no cooperation by the taxpayer, the IRS will file a lien which is similar to a civil judgment. This becomes a public record and will certainly affect the taxpayer’s credit score or rating. Liens that are ignored can be levied upon, which means the IRS can seize your property, bank accounts and houses or garnish your salary.
For situations where the standard installment agreement won’t work or for amounts over $50,000 (or $100,000 for those using the Streamlined Installment Agreement), it is best to deal directly with IRS field personnel who are called revenue officers. Most revenue officers will work somewhat flexibly with taxpayers if the taxpayers cooperate and are responsive to requests for information so the case can be resolved. In dealing with an IRS revenue officer, the thing to keep in mind is that their interest is in protecting the IRS’s position. They have an absolute right to levy against and seize your assets. If they can be shown that the IRS’s position will not be diminished, they can usually be persuaded to hold off and abide by your plan.
It is also necessary to assure the revenue officer that current taxes are being paid as required. For taxpayers with jobs subject to withholding, this is pretty easy. Those with other types of income who are required to pay estimated taxes need to show they are paying the proper amounts for the current year.
Another factor is the type of tax that is owed. Income taxes are handled much differently than payroll withholding taxes. Income taxes are a fait accompli, that is, the taxes are a finite amount and are not really increasing except for interest and penalty. A business’ unpaid withholding taxes, on the other hand, are more often a continuing problem since an operating business unable to have paid previously-due withholding taxes is highly likely to be adding to its delinquency. In those cases, it is absolutely necessary to pay the current taxes on a timely basis. If you don’t, it is highly likely that no revenue officer will be lenient with granting relief to work out a plan for the back taxes.
Taxpayers will be required to fill out a financial questionnaire and outline their income, expenses, assets and liabilities. It is our experience that the IRS will accept any reasonable payment-plan offer to liquidate the debt to the IRS.
If it appears likely that the debt cannot be paid in full within a 6-year period via an installment agreement, you should consider an offer in compromise using Form 656 to settle the debt in full for a reduced amount. This will usually require personal borrowing to come up with the funds to make the offer, but it is an excellent way to deal with the IRS. Most revenue officers will suggest amounts they think are reasonable and that would likely be accepted in their opinions—but keep in mind that your revenue officer won’t have the final say on the approval. However, it can be very helpful to get the revenue officer “on your side,” which is achieved by full cooperation and responsiveness to his or her requests.
That’s your backgrounder on remediation of back taxes. Now, absorb these critical points…
First principle: Beyond remediation steps, I can’t stress enough how important it is to also make sure you are paying your current taxes on time. Many people think that if they can’t afford to pay both back taxes and current taxes immediately, they should pay the back taxes before the current. This is totally incorrect! It costs you extra penalties and doesn’t give you the argument that you are keeping current.
Second principle: Present a realistic cash flow plan to the IRS laying out how you can liquidate the debt. This should show a true will to pay it off—including such things as what expenses you will cut and what assets could be sold or pledged for a loan.
Third principle: Keep every promise and commitment you make to the revenue officer. Make every telephone call when you say you will…send in the reports and financials that you are asked for and agree to. Even being a day late on a commitment could cause a breakdown in hard-won confidence the revenue officer has in you and could cause seizure paperwork to start. If you truly can’t keep a commitment you made to the revenue officer, let him or her know in advance that that is the case, why it is the case, and when, to best of your ability, you will be able to fulfill it.