January 24, 2017

Tax Tips from the Tax Lawyer: What IRS Collection Payment Alternatives are Available to You?

When the IRS attempts to collect the taxes you owe, it can be overwhelming to try to pay everything at once. While it is always best to pay your taxes in full as soon as possible, the IRS collections department offers alternative payment methods to paying in full on the due date. Let’s take a look at some of the options available if you cannot pay your taxes in full right away.

Keep in mind: it is important to properly assess your financial situation and the tax amount you owe so that you make the right tax payment choices. A tax attorney who is experienced with IRS tax collection alternatives can ensure that you have the best possible outcome.

IRS Extension of Time to Pay

If you cannot pay the taxes you owe to the IRS by the due date, but you know that you will be able to pay in full in the near future, you can apply for an Extension of Time to Pay.

In order to apply, you must fill out IRS Form 1127 and explain why you cannot pay in full by the due date. The IRS wants you to prove that paying in full would cause what they call “Undue Hardship.” As the IRS says in Page 3 of Form 1127, an Undue Hardship means “You must show you will have a substantial financial loss (such as selling property at a sacrifice price) if you pay your tax on the date it is due.”

If your application is approved, an Extension of Time to Pay will give you up to 120 additional days to pay the IRS the tax amount that you owe in full. This can make a big difference in your financial planning.

IRS Installment Agreement (IA)

If you are able to pay a portion of the taxes you owe the IRS over the course of a series of monthly installments, you can file to enter into an Installment Agreement with IRS collections. The basic payment plan typically spreads installments evenly over a 36-month period.

There is also a fee associated with entering into an Installment Agreement with the IRS. Fees for Installment Agreements have changed as of January 1, 2017. You can see IRS IA fee updates in the chart at the bottom of this IRS page.

Note: If you are in bankruptcy or the IRS has accepted your Offer in Compromise (covered below), you will not qualify for an Installment Agreement.

IRS Offer in Compromise (OIC)

An Offer in Compromise is an agreement with the IRS that allows you to settle your tax liability for less than the full amount that you owe. This can be a great relief if you are having serious trouble with IRS collections. Please note that before the offer can be considered, all tax filings and previous payment requirements must be up-to-date.

The IRS makes their determinations for whether you qualify for an OIC based on a list of criteria, including:

  • Present ability to pay
  • Income
  • Expenses
  • Assets

IRS Currently Not Collectible (CNC)

If your tax liability cannot be paid at all, you can request Currently Not Collectible (CNC) status. While you are under CNC status, the IRS will not attempt to collect on your debt, including levies and garnishments. In order to qualify for CNC status with IRS collections, you must show that you are experiencing substantial financial hardship.

CNCs are temporary, and though they may last for an extended period of time, it’s important to keep in mind that the amount owed will be collected if and when the funds are available to you. The IRS reviews your financial situation periodically, and may try to collect again when they find that you are able to make payments.

Note: If you are able to pay anything, IA and OIC options are preferable, as penalties and interest may still be applied to CNC status.

Bankruptcy Options

In some cases, bankruptcy can eliminate IRS tax debt through a tax discharge. This is possible with a Chapter 7 bankruptcy. (Alternatively, with Chapter 13 bankruptcy, a repayment plan can be established for IRS tax liability.) This is an option that requires an experienced tax attorney, as the filings are crucial to your long-term financial security.

Keep in mind that some tax debts cannot be discharged. These include debts from unfiled tax returns, trust fund taxes, taxes withheld from a paycheck by your employer, and any tax liens the IRS has already recorded.

Mendes Weed, LLP is a law firm serving local clients in Walnut Creek, San Ramon, and Danville. Their dedicated experience with IRS Tax Law, Trusts & Estates, and Business Law provides enhanced value to clients. Contact Mendes Weed, LLP today.

Disclaimer: The tips and materials provided on this page are for informational purposes only, offered as public service. No information on this website should be considered legal advice or used as a substitute for legal advice. For legal advice, you should contact an attorney directly.