Many taxpayers contact my office with a common concern. Their federal income taxes have become unmanageable and they are unable to pay the balance due and owing. Often, an event “pushes them over the edge”, such as an IRS levy on wages or property, the filing of an IRS Notice of Federal Tax Lien, constant IRS collection letters, or even revocation of a passport.
Generally, the taxpayer has at least five options if he or she is unable to pay federal tax:
- Borrow the money from a bank, relative or friend. Often times it is better to owe a bank or a friend rather than the IRS. Borrowing money to pay off the IRS brings some taxpayers a sense of relief knowing that they are compliant with the IRS and can give them a fresh start going forward.
- File bankruptcy. It is a common but incorrect belief that tax debt cannot be discharged in bankruptcy. In fact, income tax debt, including penalty and interest, that meets bankruptcy code law may be discharged in bankruptcy. Usually the tax debt must be three years old, along with other limitations. Bankruptcy has many other non-tax implications and should be discussed with a bankruptcy professional, but under the right circumstances, some income taxes may be discharged in bankruptcy.
- Request currently non-collectable status. The IRS can place a taxpayer in a currently non-collectable status if the taxpayer would suffer a financial hardship through an IRS tax collection. A hardship exists if the levy action prevents the taxpayers from meeting necessary living expenses.[1] While in uncollectable status, interest continues to run but the IRS does not continue to make collection attempts. The IRS typically periodically evaluates currently non-collectable status to determine if the taxpayer becomes available to pay.
- Enter into an installment agreement. The IRS offers multiple different installment agreements options that permit the taxpayer to pay the tax over time. Interest continues to run during the payment period. Depending on the amount of tax liability, the IRS may or may not require a financial statement of the taxpayer’s assets (IRS Form 433).
- Request an Offer in Compromise. An Offer in Compromise is used by the taxpayer to propose settling the tax with the IRS for less than the balance owned. Proposing an Offer in Compromise involves a mix of tax art and science. The IRS requires a detailed showing of the taxpayer’s current and anticipated income together with the taxpayer’s assets. Under the right circumstances, a taxpayer can settle tax liability for significantly smaller amounts than the outstanding tax.
A taxpayer should seek tax advice to determine if the taxpayer can use one of these options to resolve tax liability with the IRS.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP.
Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah.
[1] IRS Policy Statement 5-71; Internal Revenue Manual 5.16.1.2.9.