Can't Pay the IRS - What are Your Options?
© by Greta P. Hicks, CPA
Did April 15 leave you owing the IRS money? The IRS is not a pleasant
creditor - they have lots of hammers (lien, levy, and seizure) to use on
you. Also, just because you have an agreement with one IRS employee doesn't
mean the next individual will honor that agreement. To further complicate
matters, you may be dealing with one or more departments (called divisions)
within the agency. What are your options?
- Pay all at one time. If you had that kind of money you wouldn't be
in this mess.
- Pay in installments. It may be the deal for you but again it may
not be. Interest on the outstanding debt compounds daily.
- Make them a settlement offer. It is a good deal if you can swing
it but the numbers don't work out for everyone.
- Bankruptcy. That ugly word no one wants to say but sometimes is the
only way out.
The Collection Process
After your return is filed without full payment, you will get three
letters. Then the phone calls begin. After about a year, there is a knock
at your door. In the meantime, they may have kept a subsequent year refund,
filed a lien on your real estate, and levied your bank account or your
paycheck. At this point, they have the power to seize property and close
Owing money to the IRS is like a dead animal in the forest: the longer
it lays there, the worse it smells. The earlier your attempt to resolve
the problem, the more options you have. In the later stages of the process
your options are severely limited.
Option 1: Borrow If You Can
The "failure to pay" penalty and interest are added to
all amounts unpaid after April 15. Interest compounds daily, and the amount
of tax, penalty, and interest can double after about two years. Hence,
a good reason to try to borrow money from a bank, friend, or relative.
Before the IRS will accept any kind of installment pay agreement, you may
be required to show that you have attempted to borrow the money elsewhere.
Option 2: Ask for an Installment Agreement
When you receive your first letter, you may write the IRS, tell them
your "sad story" and request that they send you a copy of Form
433-A, 433-B, or 433-F (financial information statements). Possibly you
can work out an installment agreement with the "computer."
NOTE: If you owe less than $10,000 and
are current with all other payments and filings, you can complete a Form
9465, Installment Payment Request, and set your own payment amount.
Option 3: Ask for Case Assignment to Revenue Officer
Or, you may write the IRS and request that your account be assigned
to a Revenue Officer. Sometimes, it is easier to negotiate a payout agreement
with a live person.
Option 4: Ask for Forms to be Mailed
If you ignore the letters, you will receive a phone call from ACS
(the IRS Automated Collection System). Your options are the same as "A"
and "B" above. Do not answer their questions over the phone,
as they are completing the Forms 433-A and 433-B for you. Instead, ask
that they mail you the forms for you to complete.
Option 5: IRS Installment Agreements
The Taxpayers Bill of Rights passed in November 1988 grants the IRS
authority, under certain conditions, to allow payment of taxes on an installment
basis. These conditions include:
- Proof of attempt to borrow money from a bank
- All current forms, such as 1040, 941, 949, 1040 and 1120, are filed
- All current taxes must be paid through withholding or estimated tax
- Completion of Forms 433-A, 433-B, or 433-F
Option 6: HELP from 9 - 1 - 1
Form 911 is a form to use when there is an EMERGENCY. The official
title of Form 911 is Application for Taxpayer Assistance Order. We usually
shorten it to "hardship." Should the action being taken by the
IRS create a substantial hardship, a Form 911 may be appropriate. When
an IRS employee receives a 911, they are required to take action within
days. Most always they will cease all collection activity until the problem
posed in the Form 911 has been resolved. In the mean time you and your
representative have had time to get information organized, forms completed,
and other data the IRS Collection Division has requested. Form 911 buys
time and helps get the problem solved quicker.
Option 7: Offer in Compromise
This may be just the deal for you. Form 656, Offer in Compromise,
is a procedure whereby you can offer the IRS a amount to settle your complete
tax, interest, and penalty debt. The minimum amount the IRS will settle
for is you "net equity in assets" plus the "net monthly
cash flow" for five years. "Net equity in assets" is the
net liquidating value of your assets less the debts owed. "Net
monthly cash flow" is calculated by using your monthly income less
your necessary living expenses times 60 months times present value.
Roughly it is net monthly cash flow times 50. Forms 433-A and B are used
to arrive at these numbers. If your arithmetic works out to be less than
the IRS debt, make them an offer BUT read the conditions listed on the
Form 656 BEFORE you make the offer. There are some down sides.
Option 8: Bankruptcy
Income taxes may be discharged in bankruptcy under certain conditions.
There is a 3 year and a 240 month rule plus more fine print that you will
need to have an attorney interpret. Generally, the tax year needs to be
at least three years ago and the tax return needs to have been filed at
least 240 days. This may be your only option.
I have found that most people take these forms too lightly. Forms
433-A, 433-B, and 433-F provide the IRS with a list of all employers, bank
accounts, and real estate which the y may later seize or levy. Completing
these forms accurately and truthfully is crucial. You sign these forms
under a penalty of perjury.
The forms also provide a list of income cash and monthly cash expenses.
Any excess income over IRS allowed expenses is the amount of your monthly
payment to the IRS. The IRS definition of necessary expenses is not the
same as mine or yours. On Form 433, living expenses for movies, cleaning,
piano lessons, dancing lessons, charitable contributions and non-prescription
drugs are not considered necessary expenses. Use the IRS tables for national
and local standards for necessary living expenses, housing, and automobile
Do's And Don'ts
- Do respond timely & early
- Do give the appearance of cooperation
- Do not let any IRS persons complete the forms 433 for you either
over the telephone or in person
- Do have a person concentrating on IRS collection problems advise
you on the preparation of Forms 433
Options - Pain Relief
Knowing that you have options and what those options are will greatly
relieve your worry and stress. The earlier you act the more options you
have. The longer you wait, the less the number of options and you may be
down to the lesser of two evils. The best strategy is to know your options
and develop and offensive plan rather than having to react under pressure
and be on the defensive once the IRS has used its hammers (lien, levy,
Although the Taxpayer Bill of Rights gave you certain rights, there
is very little law to support your position. Your greatest asset is your
powers of persuasion. IRS collection personnel are no different than any
other "bill collector." They have a job to do - collect the money.
Their favorite tool is intimidation. If you respond to their show of strength
and threats, you loose your power to negotiate effectively. It may be that
you will want to get a "hired gun."
A Hired Gun
There are CPAs, attorneys, and enrolled agents who have first hand
knowledge of the inter-workings of the IRS Collection Division. When you
give them a power of attorney, they can represent you before the IRS. You
need someone who can tell you what is going to happen "before it happens."
A person who can help you plan a strategy and operate from an offensive
rather than a defensive position. Someone who can "speak the IRS's
language." A person who can tell when an Unknowledgeable IRS employee
has made a statement contrary to IRS national policy. A person who does
not intimidate easily and may do a little intimidating themselves. You
need someone who can represent you and leave you free to do what you do
best - make money!
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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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