All IRS Payment Agreements Are Not Equal

By Matthew J. Previte CPA MST
July 7, 2011

If you owe back taxes to the IRS, you have undoubtedly wondered how on earth you’re going to get a mountain of back IRS taxes off your back so you won’t have to live in fear anymore. Living with IRS tax problems is stressful and can cause many problems in your life. One of these IRS tax problems is having an IRS tax levy placed on your wages or bank accounts which leaves you with little to no money to live on. An IRS tax lien can also be filed against you in the public record (usually the county recorder or registry of deeds) which not only lets the world know about your IRS tax problems but severely damages your credit rating by a good 100 points or more, leaving you unable to get a loan. So what can you do to resolve your IRS tax problems?

Although Offer In Compromise is advertised heavily on late night TV, it is rarely an option for most people with back IRS tax debts. Roughly 95% of delinquent taxpayers with IRS tax debts do not qualify for the IRS Offer In Compromise program. Unfortunately, these late night TV hucksters tout the OIC as the magical cure-all for your IRS tax debt woes. There is an old saying, if it sounds too good to be true, it probably is. And so it is with the Offer In Compromise program. Although my tax resolution firm has filed many Offers In Compromise over the last 16 years, most of our clients who owe large back taxes to the IRS do not qualify. Simply put, they have too much equity in assets (bank accounts, houses, retirement accounts, etc) and/or cash flow (what’s left over after what the IRS allows for basic living expenses) to qualify. So that begs the question, what are my options?

While bankruptcy can sometimes be a good option, we will leave that discussion for another article (see archives for February 2011). Short of running out the statute of limitations on collection, which is generally ten years, or hitting the lottery or inheriting a boatload of money and paying off the IRS tax debts in full, the only option left is an installment agreement. However, not all installment agreements are equal.

The IRS has two different types of installment agreements to pay off back taxes. The first type is a Full Pay Installment Agreement. In this type of IRS installment agreement, the monthly payments are sufficient to pay off the back taxes (plus any penalties and interest that accrues) until it is paid off in full. With this type of IRS installment agreement, your payments will full pay the back IRS tax debts, as well as all penalties and interest accruing on the debt, within the statute of limitations on collection. The statute of limitations on collection is generally 10 years. However, there are numerous actions that can extend the time the IRS has to pursue collection action (liens, levies, seizures, etc). We will leave that to another article to discuss.

The second type of IRS installment agreement is called a Partial Pay Installment Agreement. Under this type of IRS installment agreement, the monthly payment is insufficient to pay off the back taxes plus accruing penalties and interest by the collection statute expiration date. What does this mean in plain English? Well, it means that you make payments until the statute of limitations on collection (in IRS speak the “CSED”) runs out. So if at the collection statute expiration date there is $10,000 of unpaid back tax debt, it expires to zero and you do not owe it anymore. Nice huh? There is one catch however. As part of the terms of the Partial Pay Installment Agreement, the IRS will review your financial condition every two years to see whether or not your financial condition (i.e. your ability to pay more) has improved. If it has, they will require a higher payment if your financial condition shows you can afford to pay more towards the back tax debt. The downside of this type of installment agreement is it is possible that in the future your financial condition improves and the new monthly payment required becomes sufficient to full pay the back taxes, penalties, and interest by the collection statute expiration date. In other words, it’s possible to start out with a Partial Pay Installment Agreement and end up with a Full Pay Installment Agreement. The positive aspect of a Partial Pay Installment Agreement is that if your financial condition does not improve enough or at all, you could still end up paying less than the full amount owed and end up with a large balance of unpaid back taxes expiring to zero at the collection statute expiration date.

With all IRS Installment Payment Agreements, your financial condition is reviewed via a Form 433-A and/or 433-B depending on whether your tax issues are personal or business tax debts. Individuals and sole proprietorships use the Form 433-A while corporations, partnerships, and LLCs use a Form 433-B. If you owe personal taxes and have income on your personal tax return from a flow through entity (S corporation, partnership, or LLC treated as an S corporation or partnership), you may have to submit both the Form 433-A and the Form 433-B to get your installment payment agreement approved.

There are strategies to minimize your monthly payment amount but that will be discussed in a future article. Also, just because the IRS initially denies your IRS installment payment agreement does not mean you should give up. Many initially rejected IRS installment payment agreements were later accepted upon filing an Appeal to the IRS Appeals Division. Persistence and perseverance are key to obtaining a fair IRS installment agreement that you can live with.

Will Declaring Bankruptcy Solve Your Tax Problems?

These days it seems as if you can’t turn on the television, flip open the newspaper, or surf the web without running into an advertisement for bankruptcy lawyers. For people in tough financial circumstances, bankruptcy can seem like a magical solution for all of your financial problems. Advertisements tout the marvel of having all of your debts dissolved – even outstanding tax obligations!

Is this true? Can declaring bankruptcy erase your tax obligations to the IRS or state taxing agency?

The answer is a qualified “it depends”. Before you decide to go forward with filing for bankruptcy, you need to get accurate information about your tax problems and whether or not they can be resolved more favorably through filing bankruptcy. There are alternate ways to handling outstanding tax debts, tax levies and wage garnishments without the need to file bankruptcy. Sometimes these alternate methods get a better result than by filing bankruptcy. Other times bankruptcy is the better alternative. It really depends on the facts of each person’s case since each person’s case is different. Having someone who is well versed in resolving tax problems analyze your case will allow you to choose the most favorable option to resolve your tax problems.

Bankruptcy is not always the easy fix-it that the advertisements promise in many cases. Many people with outstanding tax issues have been shocked to find out that they’ve gone through the pain, stress, and never-ending paperwork of a bankruptcy only to discover that they still owe the IRS and state taxing agency every penny – and now there are additional penalties and interest involved!

Qualified Tax Professionals

A bankruptcy attorney (or bankruptcy specialist, as they are often called) has many qualifications, but there’s something you should know. Generally, these people do not specialize in tax law or resolving tax problems. They’re not tax accountants, CPA’s, or focused on successfully resolving your tax problems. They focus on bankruptcy.
Here’s the truth of the situation. Certain types of federal and state tax debts may be discharged under the bankruptcy code. Other types are not dischargeable under the bankruptcy code. Ever. Knowing the difference between the two is critical in deciding whether or not filing a petition for bankruptcy is an option. Those types of taxes that can be dischargeable in bankruptcy must also meet three critical timing rules before they can be dischargeable in a bankruptcy proceeding.

The first rule states that the bankruptcy petition must be filed more than 3 years from the due date of the tax return, including extensions. However, caution should be taken in determining whether this rule has been met as there are several actions that can lengthen this 3 year time period and require you wait longer than 3 years from the due date of the returns. Determining whether any actions have taken place that could have lengthened this time period is critical in knowing whether this rule has been met.

The second rule states that the bankruptcy petition must be filed more than 2 years from the date the tax returns were filed. Only the filing of an original tax return can start the 2 year time period running. A substitute tax return, or SFR, filed by the IRS or state taxing agency does not qualify. As with the 3 year rule, certain actions can lengthen this 2 year time period. Therefore, determining when the original tax return was filed and whether or not anything has extended this 2 year time period is critical in knowing whether this rule has been met.

The third rule states that the bankruptcy petition must be filed more than 240 days from the date of assessment. Bear in mind that there can be multiple assessment dates for a given tax year where the IRS or state tax agency has audited or adjusted the original tax return amount or an amended tax return showing an additional balance due has been filed by the person filing bankruptcy. Therefore, determining all of the appropriate assessment dates for each tax year is critical. As with the first two rules, some actions can lengthen the 240 day time period. Determining whether anything has extended this time period is critical before filing the bankruptcy petition.

Lastly, the tax returns filed cannot be fraudulent and the person cannot have willfully attempted to evade or defeat the taxes owed.

If you have outstanding tax debt and are considering filing bankruptcy, consult with tax experts first! A qualified tax expert who resolves tax problems full time will know how to analyze whether your taxes can be discharged now or at some date in the near future and help you avoid costly mistakes. Bankruptcy can solve some financial problems, but to discharge taxes in bankruptcy you must meet the above rules as well as certain financial conditions the court requires to qualify to file for bankruptcy.

Although bankruptcy can sometimes be a solution, it isn’t always a solution. Make sure the tax expert you select has knowledge of the above rules. Interview and question any attorney you select to file your bankruptcy petition about the above rules. If they cannot tell you the basic rules, run don’t walk to another attorney! I have seen too many supposed bankruptcy attorneys file bankruptcy for someone, not knowing the basic rules, and after the bankruptcy is over, their client still has the same tax problem they did when they first filed. Don’t make that mistake. Make sure your attorney is qualified and knows what they are doing.

Preparing for Tax Season 2011: What To Do If You Have Outstanding Tax Problems

It’s that time of year again, when newspapers and websites are full of information about what you need to do to get ready for the upcoming tax season.  There’s lots of websites that offer free tax preparation, agencies that coordinate volunteer tax preparers and do-it-yourself guides that promise to reduce even the most complex return into a quick and easy refund check.

It sounds like good advice – but is it good for you?

The answer is a qualified “It depends!”  Many of the resources you’ll find listed in articles like these are great for taxpayers who have simple returns and are current with their tax obligations. However, if you’re currently embroiled in negotiations with the IRS or have tax issues that you haven’t addressed, you need professional assistance.

Finding Help For Your Tax Problems

The best way to help yourself resolve your tax problems is to work with a qualified tax professional.  You have to be honest with these people and let them know the full magnitude of what they’re dealing with.  Don’t withhold information for fear that the tax professional might ‘judge you’ – there’s nothing that they haven’t heard before!

Often times, people think that their tax problem is so unique and one of a kind that nothing could be done to resolve it.  Nothing can be further from the truth! Every tax problem has a solution.  You just need to work with someone who knows how to find it!

This year, the deadline for filing your 2010 federal tax return is April 18th.  That means you have just over one hundred days to get ready to send your return and any payment due to the IRS.  You also have one hundred days to start addressing your outstanding tax issues. Don’t wait until the last minute — there’s nothing harder to find than a tax expert with a free moment on April 15th!  You deserve expert assistance with your tax problems.