Home | Basic Information You Should Know About Common Tax Debt Resolution Options

Basic Information You Should Know About Common Tax Debt Resolution Options

Jan 30, 2023

Having a tax debt can be daunting. You’re probably wondering whom you can talk to for help and what options you have for resolution. It’s not easy to navigate all the information available on the internet to determine what information is accurate, current, and applicable to your situation. We thought it could help to share some information on the most common IRS resolution options available and what some of the pros and cons of each are:

Installment Agreement

An Installment Agreement is a resolution plan allowing you to pay back your tax debt through monthly payments. Although this option seems like it should be pretty straightforward, in reality, there are many different types of Installment Agreements, each with a different set of requirements.

Most Installment Agreements depend on the size of your debt and how much you can afford to pay toward the debt each month. Suppose your debt falls under a certain threshold, and you can pay it off before the time lapses for the IRS to collect it. In that case, you might qualify for an Installment Agreement that would avoid financial disclosure, avoid new tax liens being filed, and potentially qualify you to request existing tax liens be withdrawn. Although these agreements don’t necessarily allow you to reduce your debt, for some, the benefits of paying the debt off quickly, maintaining their financial privacy, and not having public tax liens on record make these types of agreements appealing.

If you cannot afford the type of agreement outlined above, or you don’t qualify for it based on the size of your debt, a financial disclosure-based Installment Agreement might be a better option. During the negotiations for this type of agreement, the IRS will examine your financial repayment capabilities and limitations based on your income and monthly expenses. In general, the negotiation will be based solely on your current financial condition, and potential future changes to this condition will be ignored unless you can prove the change will 100% take place. For example, if you are paying on a car loan and that loan will be paid off in one year, the IRS will consider a definite change in your financial condition. However, suppose you believe an expensive medical operation will be required in one year for a member of your immediate family. In that case, the IRS likely will not consider that expense in advance. With these types of Installment Agreements, tax liens will be required to stay in place or be filed; however, on the plus side, if you can prove your financial limitations support it, you might not end up paying back your entire debt in the amount of time the IRS has to collect it, thereby saving you money.

Currently Not-Collectible

By placing your account into a Currently Not-Collectible Status, the IRS formally agrees that you cannot make payments towards your debt at this time. This resolution may be temporary, as it allows the IRS to request updated financial information periodically to examine whether or not your ability to pay your debt has improved. These financial reviews are often triggered when you file tax returns showing a significant increase in income compared to prior years, but technically can be requested for other reasons, such as the duration of time since the last financial review. While in this status, tax liens will remain in place or be filed if not already on record. If the IRS statute to collect the debt expires while you’re in this status, all unpaid debt will be written off.

We typically recommend using this type of resolution in three different scenarios: first, a client on a fixed income that doesn’t allow them to pay off their tax debt. If we know their income isn’t going to change, it’s safe to say they will remain in this status until the IRS statute expires. Second, a client who has fallen on rough financial times but expects their financial condition to improve in the next couple of years. Although we know the Currently Not-Collectible status will be temporary in this situation, it allows the taxpayer some time to get their financial affairs in order (pay off accrued debts and catch up on bills) before having to address their tax debt. Last, a client who doesn’t have the money to pay off their taxes and only has a short period of time left on the statute for the IRS to collect the debt.

Offer in Compromise

The Offer in Compromise program is the IRS’ settlement program. Although there are three different types of Offers in Compromise programs, the one most commonly qualified for is based on the taxpayer’s inability to repay their tax debt. If a taxpayer can convince the IRS that they can’t afford to pay their IRS tax debt and will not be able to pay it within the amount of time the IRS has to collect it, the IRS may consider settling the debt for a determined amount. The Offer in Compromise process can be lengthy and require significant financial disclosure. The IRS will not only take into account the taxpayer’s income and expenses, but will also focus on equity in assets, regardless of whether that equity is readily available.

Although the Offer in Compromise process can be strenuous and lengthy, once an Offer in Compromise has been accepted and paid, the IRS will release all tax liens filed and write off the remaining tax debt. However, a big downside to this agreement is that if the taxpayer accrues a new tax debt within five years, the IRS will consider the settlement defaulted upon. The tax debt written off will be reassessed, with updated penalties and interest assessed for the forgiven timeframe.

Penalty Abatement

The Penalty Abatement program with the IRS allows a taxpayer to petition for the reduction or removal of penalties assessed based on the taxpayer’s compliance history and/or the events that caused the tax debt to accrue. Although the IRS feels strongly that enforcing penalties on taxpayer accounts is the best way to promote future tax compliance, if you can prove to the IRS that events beyond your control led to the accrual of your tax debt, they will reduce or remove associated penalties. This type of resolution option can be and often is negotiated in conjunction with an Installment Agreement, as the IRS will not consider the removal of penalties until an agreement is in place to pay back the debt owed.

These are the most common resolution options pursued by the IRS; however, they are not the only options available. Depending on your situation, there might be a less common resolution option that suits your unique situation and will provide more benefit to you as you address a tax debt issue. Some of these include Innocent Spouse, Audit Reconsideration, and Lien Removal/Withdrawal petitions. My advice to anyone with tax debt is to talk to a professional who deals with these types of situations every day and knows the ins and outs of each resolution strategy. Make sure you’re comfortable with the professional you chose to represent you. Ask them to lay out your options for you; in almost every case, multiple resolution options are available, but I find some professionals only tell their clients about the resolution option they think they should want. Be sure to ask about the pros and cons of each resolution strategy – each strategy comes with both positive and negative effects, so you’ll need to weigh these to determine what’s best for you.

At the end of the day, this is your life, and it should be up to you to choose the resolution option that feels best for you. The Golden Lion Tax Solutions team understands this and is proud to focus on educating our clients about all options available while fully disclosing the pros and cons of each option, as we want you to have complete confidence in any resolution plan we employ to tackle your tax debt issues. If you are searching for 1040 tax debt solutions, 941 tax debt solutions, or looking to solve any other tax-related matter, let the Tax Professionals at Golden Lion Tax Solutions help. Give us a call today to discuss your situation and start the process of choosing the resolution option that will be best for you!


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Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.