A few days ago I heard yet another ad on the radio from a national “debt resolution” firm discussing the “new” IRS Fresh Start initiative. As usual, the ad promised to settle IRS tax debts for pennies on the dollar. The program is not new – it’s been around for almost 5 years. Even though countless number of debt resolution firms have been shut down by consumer protection agencies, consumers will continue to fall victim to these firms because they do not understand the process.
IRS Collections Process
I wrote about the IRS collections process previously, but here’s a more succinct version. IRS debt usually arises from one of three situations:
- A tax return is filed showing tax due.
- An adjustment resulting in additional tax due is made by the IRS through an in-person audit, correspondence audit, or by the taxpayer filing an amended return.
- The IRS files a substitute for return showing tax due.
In all of these cases, the IRS must assess the taxpayer’s liability and demand payment. The assessment date is important as that is the date the collections statute begins to run (10 years). Following the assessment, a notice and a follow up notice will be sent to demand payment. If payment is not made, then the collections process begins.
Phase 1 of collections consists of a series of computer generated (CP) notices sent by the IRS Service Centers. Cases that are not resolved through this process go onto phase 2.
In phase 2 of collections, the taxpayer’s account is forwarded to the Automated Collections System (ACS). ACS has the authority to place liens on your assets, levy your bank account and other assets, garnish your wages, and enforce a lien against any 3rd party income source.
If ACS is not successful in getting an agreement from you to pay your tax debt, the case may go to Field Collections, which will result in a Revenue Officer coming out to your home or place of work. Some cases may bypass ACS and go directly to a Revenue Officer. This is typically seen with large balances or trust fund recovery cases. Revenue Officers possess tremendous authority to both settle debt cases and take enforcement action. If you are represented by power of attorney, the revenue officer will contact the representative listed on your power of attorney.
In summary, once the IRS has assessed a tax and made payment, and the taxpayer does not pay the bill or make arrangements to pay, the IRS will continue to take collection action.
Relief under the IRS Fresh Start Initiative
If you can’t fully pay your tax bill, then you may qualify for one or more options under the IRS Fresh Start Program. However, taxpayers should be aware that this isn’t a magic wand. In the vast majority of cases, taxpayers will still pay a large portion of the taxes due.
- Penalty abatement. Without getting much into the details, this portion of the Fresh Start Initiative usually doesn’t provide much relief for taxpayers. Other than First Time Abatement, all the other penalty abatement categories are difficult to qualify under.
- Installment agreement. If you owe less than $25,000 and are able to pay the balance within 72 months, you qualify for a streamlined agreement. Go to IRS.gov and set up an installment agreement. If you owe $25,000-$50,000, there’s a relaxed streamlined agreement but the IRS will request some financial information. If you owe more than $50,000, you do not qualify for a streamlined agreement, and the IRS will request substantial financial information to determine your ability to pay. It’s a good idea to hire a tax attorney when your debt is over $50,000 in order to minimize your monthly payments and take advantage of any nearing collection statute of limitations dates.
- Tax lien relief. The Fresh Start program has increased the minimum liability for filing a tax lien from $5,000 to $10,000. Additionally, taxpayers are now able to request a “withdrawal” of a tax lien that has been “released.” A withdrawal will remove the lien from your records and assist you in repairing your credit report.
- Offer in compromise. An offer in compromise is a lump-sum payment arrangement with the IRS where the taxpayer would not be able to pay his full tax liability before the expiration of the collections statute. Essentially you agree to pay $X amount in exchange for the IRS wiping out the tax debt. The amount depends on multiple factors, including your future earning capacity, current assets, secured debts, the number of individuals in your household, and other factors. Theoretically, the amount could be as little as $1 if you have no net worth and no future earning potential. Realistically, most taxpayers do not qualify for an offer in compromise, and for those that do, the offer amount will still need to be a significant portion of the debt in order to be accepted.
So the next time you see or hear an ad promising to settle your debts for pennies on the dollar, you know the ad is referring to the offer in compromise program. Keep in mind that you will likely not qualify, and if you do, you will likely still pay a large portion of your debt. What do you have to lose by hiring these companies and submitting an offer you don’t qualify for?
- You’ll pay a required 20% of the offer with the application. The IRS will not return that 20% if the offer is rejected.
- You’ll lose your fees paid to the debt resolution firm, which can be as much as $7-8,000.
- You’ve given a road map to the IRS to seize your assets. An offer in compromise requires extensive reporting of your financial information to the IRS. If the offer is rejected, you’ve basically given the IRS all the information it needs to seize those assets.
The best approach to resolving large balance IRS debt is a methodical approach that is likely to succeed. Here’s what we will do for you:
- Review your account transcripts and financial information. It’s essential to determine how much you owe and what you can afford to pay. Although you may have little savings at the end of the month due to living expenses, the IRS has it’s own standard tables of personal living expenses. If your income exceeds these amounts, you have discretionary income, and the IRS expects you to be able to pay that amount per month.
- Take a holistic view of the situation. Review all options including bankruptcy and possible sources of financing. Review the statute of limitations and determine what programs under the Fresh Start Relief you qualify for. Sometimes it makes sense to do nothing if you’re close to the collections statute expiring.
- Discuss your options with you.
- Gather and submit the required information to the IRS.
- Remove and withdraw tax liens if qualified.
This process takes time and effort, both on your part and the attorney’s, but it is the only way to ensure success in resolving your tax debt.