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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 down businesses.


Early Options

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 timely
  • All current taxes must be paid through withholding or estimated tax payments
  • 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.


Forms 433

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 expenses.


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, and seizure).

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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