Volume 8 Issue 6
Effective Payment Strategies for Tax Debt
© by Tax & Business Professionals
If you or your clients owe a tax debt, there are several basic
approaches to paying it. For starters, if the amount is not in doubt and it can be paid
over time, an IRS installment payment agreement may be in order. The Installment
Agreement (Form 433-D) is signed by the taxpayer and an IRS collection supervisor, and
is essentially a contract with the IRS which the Agency will honor if the taxpayer remains
current (makes the monthly payments) and the financial status of the taxpayer remains
essentially the same.
Usually the IRS asks for a Collection Information Statement,
Form 443-A (for individuals) or Form 433-B (for businesses), in order to determine the
financial status of the taxpayer. As might be expected, if there are substantial amounts
of liquid assets or equity that can be borrowed against, the IRS will decline to enter an
installment payment agreement. The amount of the monthly payments is, of course,
negotiable and depends on the data shown on the financial statement.
Obtaining an installment agreement does not end the problem.
Errant taxpayers frequently default (miss a payment) and often end up with forced
collection efforts, levies and the like.
Not all installment payment agreements are created equal. Watch
out for the "over-the-phone" installment payment agreements with the Automated
Collection Service (ACS) Centers. ACS wants to do "everything" on the phone and
record the same on a computer. If mistakes have been made in the telephone-data entry
process, a taxpayer may think an installment payment agreement is in effect only to be
surprised by a levy or lien. Moreover, ACS virtually always refuses to prepare Forms 433-D
(Installment Agreement). The reasons for this are not clear, but common sense suggests
that the existence of a signed agreement puts the taxpayer in a much better position.
What if the taxpayer believes the amount of tax allegedly due
is incorrectly stated or he or she simply cant pay the tax (and isnt likely to
be able to pay it in the foreseeable future)? Enter the Offer in Compromise.
Offers can be submitted to the IRS based on doubt as to
"liability" (it isnt owed, or it is too large) or doubt as to
"collectibility" (it cant be paid).
An offer can be made to the IRS if the underpinning of the tax
is in doubt. Examples could be: (1) a petition to the Tax Court was not filed but the
Notice of Deficiency was wrong, (2) the spouse was not a "responsible party" and
failed to file a protest to the imposition of the civil trust fund (100%) penalty, or (3)
the statute of limitations on assessments or collections has expired. The situations in
which such offers can be submitted are numerous and varied.
What if the taxpayer is older, permanently impaired, or
economically disadvantaged? If it appears, objectively, that the taxpayer will never be in
a position to pay all of the tax, then a percentage of the total can be offered, if the
underlying financial statements support the taxpayers position.
As might be expected, there is room for subjective factors ¾ how long has the taxpayer been unemployed and what is the
prognosis for the impairment if any, etc. There are a number of elements to consider when
making an IRS offer:
- Is the taxpayer making installment payments now? If so, the IRS
will capitalize the payments over five years and expect the taxpayer to offer at least the
amount of the capitalized payments. For example, if the taxpayer is currently paying $200
per month and the IRS capitalization factor is currently 47 times one months
payment, the taxpayer has to offer at least $9,400 ($200 x 47), or more, before the offer
will be considered.
- Offers to be paid by a non-liable party, such as Mom, Brother,
Sister-in-law, often receive more favorable treatment. Why? The IRS is getting access to
funds not otherwise available. The IRS manual tells Offer Specialists (O/S) to make sure
they will collect from the taxpayer at least what is offered by the non-liable third party
if the offer is rejected. Stated differently, take the "bird in hand."
- Dont offer zero. Even if the total amount due is legally
in doubt (doubt as to liability), if any offer is submitted offering "zero"
dollars, the offer will not even be processed. There seems to be a cadre of staffers
waiting to reject the processing of offers. Legally it appears that an offer can be for
"zero" dollars, but try to convince an IRS intake clerk of this theory. The
better course of action is to offer some amount, even if it is believed nothing should be
- Dont lie or let your client lie about assets. A lie
detected will nullify the agreement and could, in extreme cases, lead to criminal
- Remember all tax returns and payments have to be processed
timely for the next five years or the Offer, if accepted, is subsequently revoked.
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