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So You Owe the IRS Money!

© by Greta P. Hicks, CPA

The Internal Revenue Service has many hammers it uses to collect the money owed to the United States Government on back taxes. It all starts when you receive letters from the IRS computer. Later, a Revenue Officer (RO) may leave a card on the door of your residence. Or, he may make an unannounced call at your place of business. Maybe the RO has levied on your bank account, savings account, or pay check. The RO also has the power to close down businesses and seize assets including a personal residence. You may attempt to borrow money only to find that the IRS has filed a lien at the county court house.

Does all the above happen at once? No. Does it happen after the first threatening letter from the computer? No. It potentially can happen after you have received the letter that says, "Final Notice Before Levy." Most of the time it happens after communications have broken down between the RO and you or your designated power of attorney.

If you owe the IRS money, you will want to consult with an enrolled agent, Certified Public Accountant, or attorney who concentrates in resolving IRS matters. A representative experienced in practicing before the IRS can advise you of your taxpayer's rights and of alternative actions you may take. Your representative acts as a buffer between you and the IRS and allows you the freedom to concentrate on making a living rather than being involved in a potential conflict with an IRS person. Representatives experienced in handling IRS problems can explain IRS policies and procedures and help you develop an action plan for resolving the debt in question.


Do You Owe The Money?

The most important step in resolving IRS debt is to first determine "if you owe the money." Review copies of tax returns and IRS letters and notices to determine if the amount of tax owed is correct. If all information is not available from your records ask the RO for information from the IRS computer. The RO does not have copies of documents but he can secure computer print outs on pertinent information. Be very specific about what information you need from the RO. They have heavy case loads and do not spend much time researching for taxpayers. Tax account information (A print out of the activity in your accounts receivable account.) is available to taxpayers and their authorized representatives without going through the lengthy, involved Freedom of Information Act.


What Are Your Options?

Once the amount of the debt has been determined to be correct, it is time to discuss options available for payment or debt resolution. The most common options are negotiating an installment payment plan, preparing an offer in compromise, or bankruptcy. The method you choose will be determined by your personal facts and circumstances. Each alternative has its advantages and disadvantages and you have to weigh them carefully in the light of your own individual or company circumstances.


Installment Payment Agreement

The Internal Revenue Code (law) requires that all taxpayers pay their taxes either through salary withholding or estimated tax payments. On April 15 of each year, the prior year's taxes are due and fully payable. If taxes are not full paid, the IRS starts its collection process. Should you be unable to full pay a prior year's taxes, the IRS has authority to grant, under restricted circumstances, an installment payment agreement.

Before the IRS will actively negotiate an installment payment, you will need to comply with the following:

  1. All income and employment tax returns currently due must be filed and paid timely.
  2. All current taxes (this year's estimated tax payments) must be paid on time.
  3. The RO will want you to show that you do not have the ability to borrow from outside sources such as banks, savings and loans, or relatives.
  4. The RO may require that any net equity in assets be converted to cash and paid on the IRS debt.

One of the first steps to negotiating a favorable installment agreement is the completion of a Form 433A, Collection Information Statement for Individuals or Form 433-B, Collection Information Statement for Business. These forms provide the RO with the type, location, and value of assets; nature and amount of liabilities; and your monthly cash coming in and flowing out. Form 433A and 433B are signed by you under penalties of perjury.

The RO then investigates the information on the financial statements by securing information from credit bureaus, the court house, the department of motor vehicles, and other state and federal agencies. He uses this information to determine if all assets are listed and all liabilities are valid and to determine if there are assets which can be sold, levied, or seized.

The cash flow portion of the Form 433A is used by the RO to determine the amount of cash you have available for monthly payments to the IRS. The RO may question the amount of such items as rent, utilities, groceries and make a recommendation that you should reduce these items in order to make a larger payment to the IRS. Other expenditures such as contributions, cosmetics, clothing, dancing or gym lessons, college tuition, and other "optional" expenditures may not be allowed by the RO. This is where a skilled negotiator can be of greatest benefit. The IRS gives its RO no hard guidelines in this area, therefore the RO's decision is based upon his/her own judgement.

Once the amount of the installment payment has been agreed upon by you, the RO, and his/her Group Manager, the paper work is sent by the RO to the Internal Revenue Service Center where these payments are monitored. The Service Center programs their computer to recognize the exact payment amount and payment date. Any payments not made timely or in the "exact" amount, will cause a default report to be printed. The default report is sent back to the RO and the negotiation process begins again!


Offer In Compromise

An offer in compromise is an old procedure which has been given new life. There are two types of offers: Doubt as to liability and doubt as to the collectibility (Form 656). Should you owe the government money and there is little chance of your being able to pay, an offer in compromise to settle the debt based upon your inability to pay may be in order. The IRS has eased its requirements for submitting, investigating, and approving the offer. The goal of the IRS is to:

  1. Resolve tax accounts which cannot be collected in full;
  2. Collect what can reasonably be collected at the earliest possible time and at the least cost to the IRS;
  3. Give taxpayers an opportunity for a "fresh start" toward future voluntary compliance.

There has been much written lately about how the IRS is encouraging taxpayers to use the offer in compromise method of resolving the IRS debt. The coffee shops and clubs are filled with discussion about the "cure all" method of making the tax liability go away forever. Rumors abound on "How I only had to pay 10 cents on the dollar." Making an offer has its positive sides but has its undesirable traits.


Why Make A Deal?

So, you have little or no equity in any assets such as home, real estate, stocks, bonds, retirement funds, or other investments? If yes, making an offer in compromise to the IRS may be a viable alternative for debt resolution. On the IRS side, it considers an offer to settle a tax liability for less than its full amount valid if the offer is for an amount equal to the net equity you have in your assets. Net equity is the total value of your assets less liabilities owed. Value in assets is the amount you would receive for the asset if sold at a "quick sale."

If you are at an age and income level where you can never pay off the IRS, an offer in compromise may be just the tool you need to resolve the monies owed the US government.


Yea, Let's Make A Deal!

The offer is initiated by you. Forms 656, 433A, 433B (if applicable) are completed and submitted to the IRS person who is assigned your file.

Once a Form 656, Offer in Compromise, is received by the RO, he/she may or may not suspend collection action on the liability. They may continue to attempt to collect the taxes during the time the offer is outstanding (unapproved by the IRS).

If the offer is accepted by the IRS, the amount of the agreed upon offer will "wipe out" the tax liability, penalties, and interests owed to the government.


Whoa, What's The Deal?

Taxes cannot be abated or tax liens released until the total amount offered is paid in full.

You must file all tax returns and pay them in full for five years or the offer is void and all taxes, interest, and penalties owed are due.

Refunds and credits arising before or during the year in which the offer is accepted are waived.

Interest on the agreed upon offer amount begins the date the offer is accepted and continues until the offer is paid in full.

The IRS has 10 years to collect a debt owed the government. Added to the 10 years is the length of time from the date the offer is originally made until the date the offer is paid in full. If an offer is made and rejected, the period of time between the making of the offer and the rejection date is added to the 10 years. MOTTO: Do not make frivolous offers.

By signing the offer you give up the right to contest these issues in court or otherwise appeal the amount of the liability.

If you do not comply with all the terms of the offer, the entire tax liability may be reinstated.

All accepted offers will be available for review by the general public.

Some offers are accepted by the IRS on the condition that a Collateral Agreement also be signed. The RO may ask that you commit to paying the IRS "in full" if you receive an inheritance, gift, prize, or have a gain on property or sale of assets. It appears Willie Nelson signed one of these types of collateral agreements.


Is An Offer Right For You?

May be so. May be not. You and your tax advisor will need to discuss your specific facts and alternatives. An offer in compromise may be just the "fresh start" you need.


Bankruptcy

A last ditch effort to resolve a tax liability may be to file bankruptcy. If the IRS is your biggest creditor, the timing of the bankruptcy is important or the tax liability will not be discharged in bankruptcy. Consult an attorney who is knowledgeable in IRS matters and bankruptcy prior to the filing of a bankruptcy. There have been instances where if the taxpayer had waited, for example, three days, their taxes would have been discharged. The filing of the bankruptcy does stop the collection process and installment payments can be negotiated through the bankruptcy but by waiting to file bankruptcy a taxpayer can possibly get the taxes, penalties, and interest fully discharged.


What's The Best Deal?

There is no one "deal" best for each person or business. It is best to discuss all the facts with your tax advisor and determine which option - installment payments, offer in compromise, or bankruptcy - is best for you. Take the following information to you tax advisor:

  1. Copies of tax returns for all years that are in question.
  2. Copies of correspondence from the IRS.
  3. Copies of your correspondence to the IRS.
  4. List of assets and their value.
  5. List of liabilities - monies owed.

Other information which will be valuable is the medical history and ages of you and your spouse. Your advisor will evaluate all the facts and begin to formulate a plan for you. You must actively participate in this process because the ultimate decision is yours. People have many personal and emotional reasons for selecting an alternative other than the one I may consider "financially the best" for them. Remember you are the one signing the IRS documents under penalty of perjury. You are the one who makes the payments. You are the one who knows what your life's priorities are. LET'S MAKE A DEAL. GOOD LUCK!

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List of Articles by Greta P. Hicks, CPA

GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing educational materials and programs on solutions to IRS problems and is a nationally known speaker and writer on solutions to IRS problems. To arrange for consultation contact: Greta's web site: http://www.gretahicks.com

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