3 Ways in Order to Achieve Compliance If You Cannot Pay Federal Taxes

The following is a guest post by Manny Davis. Please see the end of the article for his bio.

2009 was troubling with the US economy facing financial turbulence, not experienced since the Great Depression. Consequently, many individuals will have trouble paying their taxes. Here are few options to pursue if you cannot pay Uncle Sam this year.

1) Setup a Payment Plan - This is technically referred to as an IRS Installment Agreement (IA). An IA allows you pay taxes owed over a series of monthly payments (over 3-5 years). If you owe the IRS $10k or less in taxes, you are “guaranteed” an IA that can last for 3 years. If you owe over $10k, but less than $25k, apply for a Streamlined Installment Agreement. This is coined “Streamlined” because it does not require full financial disclosure. If you owe the IRS over $25k, you need to verify your financial situation. To calculate the monthly minimum payment, take the total amount you owe, plus interest and penalties, and divide that by 30 for a Guaranteed IA, or 50 for a Streamlined or Verified Financial IA.

• Financial Situation: Ideal for taxpayers who can make monthly payments over a series of years. If you are experiencing financial hardship where you cannot make the minimum monthly payments (the IRS will verify), then explore the other options provided.
• Advantages: An IA allows you to pay taxes over a series of manageable monthly payments. Better yet, the failure to pay penalty is cut by 50% and the total interest rate is better than what a typical credit card company charges.
• Disadvantages: Ultimately, you will pay more than you originally owed due to the interest and the failure to pay penalty. Occasionally, banks offer a better yearly nominal interest rate than 7%.

2) Setup a Part Pay Installment Agreement (PPIA) – This Installment Agreement differs from the normal IA because you end up paying less than you owe. Working with a tax professional can calculate your minimum monthly payment. Also, you need to provide accurate financial information to the IRS using a Collection Information Statement (Form 433).

• Financial Situation: A PPIA is for taxpayers who cannot make a regular IA’s minimum monthly payment and who are under severe financial hardship.
• Advantages: With a PPIA, you pay less than you owe, as the Statue of Limitations (time the IRS can legally collect) becomes applicable to portions of your tax debt.
• Disadvantages: It is difficult to qualify, and usually a tax professional is needed. Also, equity in assets needs to be utilized (if you have any) to satisfy a portion of your tax liability and the IRS will assess your financial situation every 2 years. If your financial situation significantly improves after 2 years, the IRS could increase your monthly payment or cancel your agreement, and request full payment.

3) Apply for an Offer in Compromise (OIC) – When you hear about “settling for less” with the IRS, an OIC is that mechanism. Basically, an offer is made to the IRS for what you can pay. In order to qualify, you must show that the tax amount assessed is incorrect; the IRS probably will never get the full tax amount from you, or if they try, you would experience severe financial hardship. Normally, an OIC is accompanied with a letter stating why a reduction is necessary. The IRS will not accept an OIC unless your offer is equal to or greater than your “Reasonable Collection Potential,” or the amount the IRS thinks should be collected from you.

• Financial Situation: An OIC is an option for taxpayers who cannot make the minimum monthly payment on a regular IA and/or experiencing financial hardship.
• Advantages: An OIC can be a way to pay less than owed. Unlike a PPIA, once an OIC is accepted it is finalized; it cannot be augmented later (unless you fail to comply with the agreement).
• Disadvantages: OIC’s are rarely accepted (10-15% acceptance rate). Moreover, if your OIC is not accepted, and you selected a lump sum payment option, the 20% payment required will be applied to your total tax liability (it is non-refundable). Working with a tax professional is recommended, due to the calculations and cumbersome paperwork, as well as increasing your acceptance.

The inability to pay your IRS bill is a difficult situation to experience; however, thousands of taxpayers face the same problem yearly. Bankruptcy is another alternative to consider (not mentioned above), but a last resort because taxes are rarely discharged, but also due to the long-lasting damage to your credit. Ultimately, make sure that taxes are filed and paid as able to reduce penalties and interest.

This is a guest post from Manny Davis, a tax accountant for Back Taxes Help, a firm that specializes in resolving back taxes, tax liens, tax levies, penalties, audits and more.