If the IRS comes knocking, what can you do if you don’t have the means to pay their bill? The tax resolution you are seeking may not be to challenge the IRS assessment, but simply to help you comply with your tax obligations when you can’t afford them. There are many options, a few of which are outlined below. If you’re hiring a tax resolution services professional, such as a CPA or EA, they’ll be able to explain in detail the full range of options available to you.
If you cannot settle your tax debt in full immediately, you may opt to request to pay in installments. If the IRS accept an installment agreement, the tax you owe will be broken up into smaller payments based on how much you can afford each month, referring to essential living expenses such as housing, vehicle, food and insurance. Guaranteed installment agreements don’t require a financial statement to be submitted to the IRS but are only permitted if certain conditions are met including a tax assessment of less than $10,000 and the outstanding tax bill paid in full within three years. A streamlined installment agreement requires that the debt must be settled within a six-year period, and limited to a tax liability of under $50,000 for individual taxpayers and sole proprietors who have ceased business or under $25,000 for businesses that are still operating. Businesses with less than $25,000 in tax debt may also request an in-business trust fund express agreement, which requires settlement within two years or the end of the collection period, whichever falls first. If the taxpayer does not qualify for any of the aforementioned types of installment agreements, then a routine installment agreement may be available.
Note that if the IRS accepts the installment plan, you’ll need to pay a fee. In some instances, the IRS will reject a request for an installment agreement, which you have the right to appeal. Be aware that despite the IRS accepting a payment plan in installments, interest will still accrue on the unpaid balance throughout the installment agreement period. Therefore before applying for an installment agreement, consider if you are in a position to borrow from a family member or bank at a lower interest rate. If you compare the total costs taking interest into account, it may be more economical to pay the IRS upfront.
Like an installment agreement, an Offer in Compromise (OIC) entails an application process and associated fees. The IRS may grant an OIC which allows you to pay only a portion of the total balance. For the IRS to accept less than the full tax assessment amount, you must have insufficient income or assets to meet the debt or be able to show that paying off the tax debt would lead to financial hardship. There are two types of offers; the first is a Lump Sum Offer which requires 20% of the bill to be settled upfront, with the balance paid within five months. The second is a Periodic Payment Offer, where payment of the offered amount is spread over two years. Unfortunately, an application for OIC can take many months to be processed. Note that if no response has been given by the IRS within two years of receipt of the offer, then the offer is deemed to be accepted.
If you are struggling financially, you may be able eligible to be assigned the status of CNC (Currently Not Collectible), which is determined by the IRS based on your financial situation. If you claim that you are unable to settle your tax liabilities whilst also paying for reasonable living expenses, you may be required to provide the IRS details of your finances such as income and expenses and whether you are in a position to sell any assets. If the IRS agrees, your account will be designated as CNC.
The CNC designation will protect your income from any levy however be aware that during this period, penalties and interest will still accrue. The IRS will periodically check if there has been any change to your income whilst your account is CNC, to determine if you if your financial situation still meets the criteria for CNC status. This will normally continue for ten years after the tax has been assessed, although this collection period may be extended under certain circumstances.