What You Need to Know About Resolving IRS Tax Debt
Many American taxpayers face income tax debt with the IRS and are subjected to severe IRS collections efforts, including levies, garnishments, and liens. Taxpayers facing what may seem like the full force of the federal government breathing down their necks far too often give up on a disputed tax issue or back taxes that they just can’t pay. With a better understanding of their rights, taxpayers can perhaps find some peace of mind in their struggle with the IRS. The options available to taxpayers typically fall into two categories: (1) disputing a tax assessment; and (2) paying or settling tax debt.
Disputing IRS Tax Debt
I have encountered many clients who were trying to settle or make payments toward tax liabilities that were genuinely disputed. They were under the impression that since the IRS had assessed tax, they were forever encumbered by that assessment. Contrary to this belief, there are an array of options available for taxpayers to dispute an IRS tax assessment. A summary of these options is provided below:
- Audit Appeal
All taxpayers have a right to appeal an IRS audit report. The appeal is handled by an independent IRS agent that takes into consideration any disputed audit issues.
- Tax Court
If the IRS has decided to move forward with a tax assessment (typically because the audit report was not appealed), they are required to issue a notice of deficiency. This notice serves as a 90-day ticket to tax court as it allows taxpayers a 90-day window to file a petition with the U.S. tax court. Once the petition is filed, a taxpayer can dispute the tax in court without paying the proposed assessment.
- Audit Reconsideration
This option is generally used when rights for an audit appeal have lapsed. An audit reconsideration is an administrative request within the IRS for an independent review of disputed issues or additional facts and circumstances that were not presented during the original audit. This option is powerful because it can be used after a taxpayer’s tax court rights have expired and the assessment has become final.
- U.S. District Court
A taxpayer can also challenge a tax assessment in U.S. district court. This option is not common as the law requires the taxpayer to pay the proposed assessment before suit can be filed. A taxpayer can get a jury trial in U.S. district court.
- Offer in Compromise – Doubt as to Liability
When all else fails, a taxpayer can file an offer in compromise, doubt as to liability. This option, while similar to an audit reconsideration, is generally held for exceptional circumstances after virtually all administrative remedies have been exhausted. This option allows a taxpayer to propose a figure to settle the tax assessment based on the taxpayer’s disputed issues.
Paying or Settling Tax Debt
When taxpayers have undisputed tax debt or disputed tax debt that somehow cannot be resolved (through the options above), there are four general options available to prevent the IRS’ crippling enforcement measures by either paying or settling the tax debt. All of the options below require a financial analysis to determine the most appropriate option.
- Installment Agreement
Taxpayers who qualify can pay their outstanding tax liability through periodic monthly installment payments. To qualify, a taxpayer must generally owe less than $100,000 (in assessed tax) OR qualify by submitting a detailed financial statement to the IRS. Penalties and interest continue to accrue throughout the term of the installment agreement, which can prove quite costly (reaching up to 25%).
- Offer in Compromise – Doubt as to Collectability
This option is a powerful tool available to taxpayers who meet certain financial conditions. If a taxpayer meets these conditions, then the tax debt can be settled for less than what is owed. Generally, the minimum offer amount is determined by adding the taxpayer’s equity in all assets and their net disposable income multiplied by 12. Any liens placed against the taxpayer are removed if the offer is accepted and paid off by the taxpayer.
- Partial Pay Agreement
Similar to an offer in compromise, a partial pay agreement is an installment agreement that adds up to less than what is owed. The IRS still reserves the right to file liens and any existing liens will remain until the partial pay agreement has been fully satisfied.
This option allows taxpayers to discharge certain taxes through bankruptcy. There are three basic requirements that must be met to discharge federal income taxes in bankruptcy: (1) more than three years have passed since the tax return was due, (2) the tax return was filed more than two years before bankruptcy was filed, and (3) at least 240 days have passed since the date of the IRS assessment. Keep in mind that not all taxes are dischargeable and certain filings such as offers in compromise may extend the applicable statute of limitations.
Which Option Should I Choose?
It is important to consult an experienced tax attorney to help determine the best possible course of action. All cases are different and the best option is largely dependent on a variety of facts and circumstances. There are thousands of regulations in the U.S. tax code that provide exceptions and caveats that should be considered when determining a sound game plan to resolve IRS tax debt, whether disputed or undisputed.