Most people qualify to make payments on the IRS debt over time. The IRS typically calls these “installment agreements”.

There are different kinds of IRS installment agreements.

Some are set up to pay the IRS debt in full before the collection statute expiration date expires, some pay only a portion or even none of the IRS debt before the IRS collection statute expiration date expires. Learn More

Whether or not the IRS payment is set up to full pay or to “partial pay”, many Taxpayers, at some point during the process, default on the payments.

What are the reasons for default?

Taxpayers default for several reasons:

LATE FILED RETURN

If the Taxpayer filed a return late after the payment plan is arranged, the system will kick the taxpayer out or default the plan.

NEW BALANCE

If the Taxpayer has a new debt after the payment plan is arranged either from a new tax year, or as a result of an IRS audit, the IRS will eventually default the payment plan.

PAYMENTS MISSED

If the Taxpayer misses two payments within one tax year, the IRS will default the payment plan.

FAILURE TO PROVIDE UPDDATED INFORMATION

If the Taxpayer is asked to update financial information (the IRS will usually ask every two years if in a payment plan or every year in a non-collectible status arrangement), and doesn’t, the IRS will default the payment plan.

When the Payment Plan defaults, will the IRS levy or garnish?

If the Taxpayer defaults on the plan, the system will eventually move the debt back into the IRS’ collection system. That collection system will first send a “notice of default” and provide 30 days to correct the problem/request re-instatement.

If the Taxpayer doesn’t request reinstatement within the 30 day period, the IRS will terminate the plan.

The Taxpayer will then have 30 days to appeal the termination.

If the appeal isn’t filed or if it’s unsuccessful, the IRS can start the collection process again and issue levies, garnishments etc.

How to prevent IRS Collection when a default occurs?

ASK FOR REINSTATEMENT

If the Taxpayer asks for the payment plan to be reinstated within the 30 day initial period, the IRS may agree and simply reinstate the plan OR it may ask for new/updated financial information for review.

The IRS will usually agree to reinstate the plan if the default occurred because of new debt that can be paid in a few months or the Taxpayer qualifies for a streamlined payment agreement and hasn’t defaulted within the last 12 months on the payment plan.

RE-ANALYZE OPTIONS AND WORK WITH IRS ON NEW PLAN

If the IRS requests updated financial information and won’t just agree to reinstate the plan, the taxpayer may be able to avoid providing it, if the Taxpayer qualifies for streamlined/non-streamlined payment plans.

If an “ability to pay” plan or non-collectible status are necessary, the detailed financial information will have to be provided.

Either way, the payment plan will end up looking different than the previous plan.

This may be good or…not, depending on the current debt amount, and the Taxpayer’s current income, budget, and asset situation.

What Is an IRS “full Pay” Installment Agreement?

Most individuals with IRS debt will qualify to make payments on the IRS debt over time. The IRS typically calls these “installment agreements”.

There are IRS installment agreements that only pay a portion of the IRS debt before the IRS collection statute expiration date expires barring the IRS from collecting the remainder. (partial pay/ability to pay/non-collectible status arrangements)

There are also installment agreements that pay the full amount of the IRS debt, before the IRS collection statute date expires.

Which one the taxpayer proposes, will depend on that taxpayer’s situation.

Some taxpayers don’t qualify to settle the IRS debt or use a partial pay/ability to pay/non-collectible status arrangement. The taxpayer typically is making too much money to qualify and/or is trying to protect assets.

Will the IRS Actually Try to Collect the Debt via Levy or Garnishment?

If the taxpayer ignores the IRS and it’s “final notice” warning, the IRS will garnish wages and attempt to levy bank accounts and other assets. Taxpayers are often surprised when the IRS does this….but it does it in almost every instance where it’s ignored.

How to Prevent IRS Collection with A Full Pay Payment Plan

There are 4 steps that the taxpayer must take to prevent IRS collection of an IRS debt.

COMPLIANCE

Compliance for purposes of dealing with the IRS means a few things. First, it means that the taxpayer has filed all required tax returns. Second, it means that the taxpayer has made certain, recent estimated payments (pre-payments in an attempt to ensure less liability at the end of the year).

ANALYSIS

The taxpayer needs to propose a legal alternative to IRS collection. There are several potential alternatives. Which alternative the taxpayer proposes will depend on the facts of the taxpayer’s “case”.

It may also depend on whether the taxpayer can legally arrange or re-arrange the facts in order to make a proposal “better”. For instance, the taxpayer may need to start making payments on federally guaranteed student loans in order to keep the student loan from defaulting. Setting those payments up may provide the taxpayer a side benefit in the form of a better legal option in relation to the IRS debt.

In order for the taxpayer to know which legal option is best or may be best with some “planning”, a complete analysis of the taxpayer’s IRS debt, history, income/budget, assets, etc. should be undertaken by someone who is very familiar with IRS rules and laws.

A taxpayer may not know/understand whether a “full pay” installment agreement is the best option without undertaking this type of analysis.

PREPARATION

In most situations, the taxpayer must prepare certain documents, often signed under the penalty of perjury, and supply those documents to the IRS. These documents must be carefully prepared as the information placed in them must align with the facts.

SOLUTION PROPOSAL

The IRS won’t create a solution for the taxpayer, unless you consider a solution to mean asset seizure and/or wage garnishment.

The taxpayer must approach the IRS and propose a solution. The IRS will take the proposal under consideration, review the history and items provided, and make a determination.

Depending on the circumstances, this proposal may be reviewed while the taxpayer is on the phone with the IRS or the review may last months.

In any event, if the proposal isn’t made, the IRS will take the position that it’s still in collection mode and will continue down the path of levy/garnishment.

A payment plan proposal will stop IRS collection.

A full pay proposal will stop the IRS collection machine more readily, as qualification for a full pay installment agreement is typically easier and the review process by the IRS is much faster.

What Next?

Any taxpayer with serious IRS debt should ask an experienced tax resolution professional to help them become “compliant” and determine which path is best to deal with the debt.

If the professional’s determination is that a “full pay” payment plan is the best option, the professional should be willing to explain the process necessary to obtain this type of payment plan, and how to use it to ensure that IRS collection activity has stopped.

Most individuals with IRS debt will qualify to make payments on the IRS debt over time. The IRS calls these arrangement installment agreements. These installment agreements can be based on time or they can be based on the taxpayer’s financial situation. (Learn more here)

What Is an IRS Lien Notice?

When a taxpayer owes the IRS a debt, the IRS has a lien, or a claim against the taxpayer’s assets automatically. The IRS doesn’t have to sue the taxpayer, obtain a judgement and record that judgement, as other creditors do in order for that lien to exist.

However, the lien that comes “into being” once the debt exists is a “secret”. No one knows about it other than the IRS and the taxpayer. As a result, the IRS’ interest in assets the taxpayer may own isn’t protected as to the taxpayer’s other creditors.

In order to protect it’s interest, the IRS will record what is called a “Notice of Federal Tax Lien” in the county where the taxpayer lives or has assets.

When it does this, other creditors are on notice that the IRS has “first dibs” as to the taxpayers assets.

Can the IRS Installment Agreement Prevent an IRS Lien Notice Recording?

$50,000.00 ASSESSED BALANCE AND NO LIEN NOTICE YET FILED

If the “compliant” taxpayer owes an assessed balance of $50,000.00 or less, that taxpayer can arrange an auto-debited “streamlined” installment agreement that pays the debt over 72 months or within the time period remaining on the IRS’ collection statute, whichever is shorter.

The assessed balance is the amount of the debt on the date the IRS originally place the debt “on the books” and added the initial portions of penalty and interest. This aids the taxpayer in that even if the debt has grown much larger than $50,000.00, the assessed balance may be low enough that the taxpayer can make a payment to get that assessed balance to $50,000.00 and then pay the total balance according to the streamlined payment terms.

In essence, a taxpayer with much more than $50,000.00 in total debt can qualify for a streamlined agreement without needing to pay the actual balance to $50,000.00.

As a result of this arrangement, the IRS should agree not to record the notice of federal tax lien for the years owed.

Many taxpayers tend to have one of two problems in setting this type of arrangement up.

The first is that the debt is often just large enough that the taxpayer can’t pay the amount necessary to get the balance to the necessary $50,000.00 assessed amount.

The second, the taxpayer can’t afford the payment amount monthly and is forced to use an “ability to pay arrangement” or non-collectible status arrangement. Both result in lien notice filings.

Can the IRS Installment Agreement Remove an IRS Recorded Lien Notice?

$25,000.00 ASSESSED BALANCE AND LIEN NOTICE ALREADY FILED

If the “compliant” taxpayer owes an assessed balance of $25,000.00 or less, that taxpayer can arrange an auto-debited “streamlined” installment agreement that pays the debt over time.

As a result of this arrangement, the IRS should agree, after 3 payments are auto-debited, to “withdraw” the lien notice,

An IRS non-streamlined installment agreement is an agreement a taxpayer makes with the IRS to pay a tax debt in full when it is between $50,000.00 and $250,000.00. The taxpayer must agree to pay the debt in full on or before time that remains before the IRS’ collection statute expiration date runs out. These types of agreements are relatively new, and come with some benefits for certain taxpayers, and negatives for others.

What Are the “pros” of An IRS “non-Streamlined” Installment Agreement?

TAXPAYER IS ABLE TO AVOID PROVIDING FINANCIAL DISCLOSURE

A non-streamlined installment agreement helps the taxpayer avoid the additional difficulty related to providing the IRS a complete breakdown of income, budget, assets and other historical financial information. If the non-streamlined payment plan amount is going to be less than the taxpayer would be able to arrange by providing the financial information, avoiding the disclosure is typically a benefit.

AVOID LOSS OF ASSET

When a taxpayer sets up a full pay non-streamlined plan, the IRS usually becomes disinterested in assets. In a plan that pays only a portion of the IRS debt before the 10 year statute of limitations clock on collection runs, the IRS will often look to assets to supplement the payment of the debt. A non-streamlined agreement usually avoids this problem.

INTEREST AND PENALTY ARE REDUCED

A payment plan with the IRS will reduce the amount of interest and penalty the IRS assesses and allows to accrue.

SIMPLER TO ARRANGE

Full pay non-streamlined agreements are easy to set up… assuming the debt meets the criteria, necessary returns have been filed, and no revenue officer has been assigned to the case.

CAN DO WITHOUT LEGAL HELP

The only legal help necessary to arrange a non-streamlined agreement is the advice from an experienced tax attorney about whether a non-streamlined agreement with the IRS will make more sense than an “ability to pay” agreement, an offer in compromise, “streamlined” agreement, or a bankruptcy filing.

What Are the “cons” of An IRS “streamlined” Installment Agreement?

AFFORDABILITY

A non-streamlined installment agreement takes all of the debt, penalty, and interest that has accrued and new penalty and interest and spreads it out over the collection statute period that remains. For many taxpayers, the amount they’d have to pay in an “ability to pay” installment agreement is less than the amount necessary to create a non-streamlined agreement. If the taxpayer can’t afford the non-streamlined amount, other options should be considered.

IRS LIEN NOTICE FILING

If the balance is between the $50,000.00 and $250,000.00 when the non-streamlined agreement is arranged with the IRS automated collection unit, and no “notice of federal tax lien has been filed with the County Recorder, the IRS will file the lien notice. If the debt is close to the $50,000.00 amount (assessed), the taxpayer with no lien notice filings may want to pay the debt to the $50,000.00 (assessed) threshold and use the streamlined installment agreement in order to avoid new lien notice recording/filing.

MUST PAY DOWN TO OBTAIN IRS WITHDRAWAL OF LIEN NOTICE

In order to remove the lien notice, the taxpayer would need to pay down the debt to less than $25,000.00 “assessed” and change the agreement to a “streamlined” agreement. After 3 months in the streamlined agreement the taxpayer can ask for lien notice withdrawal.

IS IT THE BEST OPTION?

As the non-streamlined agreement is simpler to arrange than many other IRS debt options, taxpayers will often choose it before fully understanding other options, whether the taxpayer can truly afford the payment, or that the IRS will record a lien notice once the agreement is in place. Sometimes, arranging a non-streamlined agreement will be a negative for the taxpayer overall. It’s best to determine the pros and cons of all of the taxpayer’s potential options before choosing a non-streamlined agreement as an IRS debt solution.

An IRS streamlined installment agreement is an agreement a taxpayer makes with the IRS to pay a tax debt in full that is less than $50,000.00 over 72 months or the remaining time on the IRS’ collection statute period. These types of agreements are very common and come with some benefits for certain taxpayers, and negatives for others.

What Are the “pros” of An IRS “streamlined” Installment Agreement?

TAXPAYER IS ABLE TO AVOID PROVIDING FINANCIAL DISCLOSURE

A streamlined installment agreement helps the taxpayer avoid the additional difficulty related to providing the IRS a complete breakdown of income, budget, assets and other historical financial information. If the streamlined payment plan amount is going to be less than the taxpayer would be able to arrange by providing the financial information, avoiding the disclosure is usually a benefit.

AVOID LOSS OF ASSET

When a taxpayer sets up a full pay streamlined plan, becomes disinterested in assets. In a plan that pays only a portion of the IRS debt before the 10 year statute of limitations clock on collection runs, the IRS will often look to assets before agreement is made. A streamlined agreement avoids this.

AVOID IRS LIEN NOTICE FILING

If the balance is less than $50,000.00 “assessed” when the streamlined agreement is arranged with the IRS automated collection unit, and no “notice of federal tax lien’ has been filed with the County Recorder, the IRS will agree to abstain from filing the lien notice as long as the payment is auto-debited from a bank account.

OBTAIN IRS WITHDRAWAL OF LIEN NOTICE

If the balance is less than $25,000.00 “assessed” and a notice of federal tax lien has already been recorded with the County, the IRS will agree to withdraw the tax lien notice after 3 payments are made from an auto debited account.

INTEREST AND PENALTY ARE REDUCED

A payment plan with the IRS will reduce the amount of interest and penalty the IRS assesses and allows to accrue.

SIMPLER TO ARRANGE

Full pay streamlined agreement are easy to set up assuming the debt is at $50,000.00 “assessed”, necessary returns have been filed, and the taxpayer can provide the IRS with a 433d form that provides some information including the bank account information necessary to auto-debit the payment from.

CAN DO WITHOUT LEGAL HELP

The only legal help necessary to arrange a streamlined agreement is advice from an experienced tax attorney about whether a streamlined agreement with the IRS will make better sense than an “ability to pay” agreement, an offer in compromise, or a bankruptcy filing.

What Are the “cons” of An IRS “streamlined” Installment Agreement?

AFFORDABILITY

A streamlined installment agreement takes all of the debt, penalty and interest that has accrued and new penalty and interest and spreads it out over 72 months or the time remaining for the IRS to collect whichever is shorter. For many taxpayers, the amount they’d have to pay in an “ability to pay” installment agreement is less than the amount necessary to create a streamlined agreement. If the taxpayer can’t afford the streamlined amount, other options should be reviewed before arranging the plan.

IRS HAS BANK ACCOUNT INFORMATION

Once this type of arrangement is set up, the IRS will begin debiting the payment each month. Some taxpayers learn the hard way that if the financial situation changes, it can be difficult to get the IRS to stop the payments or adjust them.

“BOUNCED” PAYMENTS

Taxpayers have to pay close attention to the account each month to ensure funds are present to make the payment.

The IRS has several types of payment plans that a taxpayer can use to pay their IRS debt in full over time.

EXTENSION TO PAY

When a taxpayer is attempting to pay the debt in full but needs some more time to gather the funds and possibly to conduct some additional analysis of options, an IRS extension to pay can be requested. If the IRS agrees, it will place a hold on IRS levy activity for a period of up to six months allowing the taxpayer this time to pay the debt off.

GUARANTEED INSTALLMENT AGREEMENT

If the taxpayer’s debt is less than $10,000.00, a full pay installment agreement can be requested. If the taxpayer is “compliant” this arrangement is guaranteed if the proposal is to pay over 36 months.

STREAMLINED INSTALLMENT AGREEMENT

If the IRS debt is less than $50,000.00 based on the amount owed on the date of original assessment, and the taxpayer is “compliant”, the IRS will usually agree to a payment plan that allows for full payment over 72 months or time remaining until the collection statute expiration date runs out…whichever time-frame is shorter.

NON-STREAMLINED INSTALLMENT AGREEMENT

If the IRS debt is more than $50,000.00 but less than $250,000.00. the taxpayer can ask for a payment plan that divides the debt up over the time the IRS has remaining to collect the debt.

“SIX YEAR RULE” INSTALLMENT AGREEMENT

Where the taxpayer doesn’t meet requirements for other full pay agreements and the IRS is attempting to use the taxpayer’s actual income and budget information to determine the amount of the payment plan, most “actual” finances may be used to determine the amount of the payment plan per month if the taxpayer can pay the debt within the remaining time on the IRS’ collection statute period or six years, whichever is less. Actual finances are those that may exceed the IRS’ collection financial standards.

What Are the Benefits of A “full Pay” Installment Agreement?

AVOID FINANCIAL DISCLOSURE

If income and budget numbers will result in a monthly installment payment that’s higher than what the full pay installment payment would be, it usually doesn’t make sense for the taxpayer to provide income and budget numbers to the IRS ACS unit.

AVOID LOSS OF ASSET

If the taxpayer attempts to arrange an “ability to pay” agreement or as it’s otherwise commonly known, “partial pay agreement”, the taxpayer is proposing to pay an amount per month that won’t pay the IRS debt in full before the statute period for collection runs out. When this type of arrangement is proposed the IRS can and sometimes will demand that certain assets be liquidated in exchange. A full pay plan will help the taxpayer avoid this outcome.

AVOID IRS LIEN NOTICE FILING

When the IRS debt is $50,000.00 or less based on the amount that existed on the date of assessment, a full pay installment agreement with payments debited from an account, will prevent the IRS’ filing of a lien notice with the county where the taxpayer resides or taxpayer’s assets are located. The “assessed” balance is often much less than the current balance as the assessed balance contains the original principal and just the penalty and interest on that initial date added to the original principal As an example:

If the taxpayer’s original assessed balance were $48,000.00 and the current balance, $62,000.00, and the IRS still had more than 72 months to collect the debt, the taxpayer would qualify to pay the $62,000.00 over 72 months and avoid the lien notice filing.

OBTAIN IRS WITHDRAWAL OF LIEN NOTICE

If the IRS has already recorded a “notice of federal tax lien”, and the taxpayer’s debt is already below $25,000.00 “assessed” or can be paid to $25,000.00 “assessed”, the IRS will agree to “withdraw” the recorded lien notice after 3 payments if those payments are auto deducted. This avoids the need to attempt a lien release/withdrawal request.

SIMPLER TO ARRANGE

Full pay plans, even those where the debt is as high as $250,000.00 are relatively simple to arrange if the debt is with the IRS’ automated collection unit. A IRS 433d form will be necessary If the IRS debt is more than $50,000.00 (assessed) but less than $250,000.00.

CAN DO WITHOUT LEGAL HELP

The IRS automated collection service, though difficult to reach, is often helpful in arranging full pay agreements if the taxpayer is “compliant” (all returns filed and assessed and required estimated payments are being made). It’s often beneficial for the taxpayer to pay for an experienced attorney to review financials to determine if the full pay agreement option is the best, but paying that counsel to arrange it isn’t usually necessary.

What Other Options Should Be Considered Before Agreeing to A Full Pay Installment Agreement?

IRS OFFER IN COMPROMISE

An IRS Offer in Compromise is the “Lamborghini” of direct IRS debt options. It’s the fastest in terms of moving on from the debt if successful and it’s the most difficult to obtain when viewed from the standpoint of success vs. number of taxpayer’s with IRS debt in the United States. If the taxpayer qualifies and can make it work, the Offer in Compromise can result in tremendous savings. It must be fully reviewed as an option before the taxpayer commits to a full pay plan if possible.

IRS PARTIAL PAY INSTALLMENT/ABILITY TO PAY AGREEMENT

The IRS partial pay installment or agreement or as it’s often called, the “ability to pay” agreement is the most common, long term way taxpayers reduce IRS debt. It’s often considered a long-term offer in compromise as a result. It is usually reviewed as an option before the full pay payment plan is used in order to determine whether the taxpayer could pay less per month and use the combination of the smaller payment and the collection statute expiration date to remove some of the debt.

IRS NON-COLLECTIBLE STATUS AGREEMENT

The IRS’ non-collectible status arrangement is a payment plan as well, but one where the payment is zero per month…at least for a short period of time. Many taxpayers qualify for IRS non-collectible status. Many stay in the status for years with the collection statute period runs, and many use them short term when necessary only.

BANKRUPTCY

A bankruptcy filing does actually make sense in certain limited situations. The most common is when the taxpayer is struggling with other debt that the IRS isn’t counting as a monthly budget item (consumer debt). The taxpayer can often remove the consumer debt obligation and some or all of the tax debt obligation making it easier to survive month to month. Bankruptcy use for IRS debt purposes isn’t for the “faint of heart” and discussion with and analysis by an experienced attorney is necessary before embarking.

If I’m in A “full Pay” Installment Agreement with The IRS, Can I Change It Later?

Yes. A taxpayer currently in an IRS full pay installment agreement can file an offer in compromise or bankruptcy later. The taxpayer can also switch to IRS non-collectible status or arrange an ability to pay agreement if those make sense and are available.

The taxpayer isn’t “stuck” in the full pay arrangement and shouldn’t stay in it if the situation changes enough that the full pay plan is causing serious stress.

However, it’s strongly encouraged to have experienced help analyze the situation to ensure what the other option(s) may look like, good or bad, before deciding to halt payments.

1. The IRS has assigned collection of your IRS debt to a private debt collector

The IRS is understaffed, and as a result has moved some collection files to private collection agencies. It’s chosen your file because it may have found it difficult to locate you or your assets.

There are four private collectors who are licensed to collect IRS debt. CBE Group, Conserve, Pioneer and Performant.

Your CP40 letter should contain the contact information of one of those four companies.

The IRS has a page dedicated to the private collection program and you can learn more about these companies and how the private collection operates.

2. You aren’t facing levy or garnishment…at least for now

Private debt collectors who work on IRS collection matters don’t have the ability to garnish wages or levy accounts and assets. They also can’t issue lien notices. They aren’t required to share your financial info with the IRS. My guess is that they do.

Their abilities are limited to requesting payment and proposing payment plans.

If you respond and an arrangement can’t be worked out, it’s probable the collection file will go back to the IRS collection unit where more serious consequences await.

3. It may make sense to leave your IRS debt matter with the private collector and use the CSED to your advantage

The IRS has 10 years to collect a tax debt. This time-frame and exceptions to it are governed by the CSED Section of the Internal Revenue Manual.

If your debt is “close” to running it’s CSED course, the IRS’ ability to collect the debt is close to running it’s course as well.

If this is the case, it may make sense to try and keep the file with the private collector for as long as possible. Talking to the private collector and being unable to reach an agreement may cause as mentioned… the case to move back to IRS collections.

cp40.pdf

Many taxpayers have the mistaken impression that making a “deal” with the IRS is an informal process. Unfortunately, it’s just the opposite. It’s a process governed by a number of laws and rules and also by how those laws/rules apply to the taxpayer’s situation. Once this is understood, it’s easier to understand why the second step is necessary.

Second Step – Understanding Options

The law provides a number of ways to deal with an IRS debt

Everyone with an IRS debt would like it to be forgiven of course. The primary method that taxpayers believe this occurs is via the IRS offer in compromise process (OIC).

The OIC allows the taxpayer to pay less than what’s owed if certain conditions are met. The first condition is proving to the IRS that the taxpayer can’t afford to pay the debt over the time remaining on the collection statute expiration date. The collection statute expiration date is the time the IRS has left to collect. Most people with tax debt can’t get past this first condition. Of those that can, many can’t pay the offer amount that’s calculated using a formula.

Fortunately, the law provides other ways to reduce IRS debt.

The most common methods used are the “partial-pay” installment agreement and “non-collectible status”. Both options require the taxpayer to prove to the IRS, that he or she can’t afford to make a monthly payment large enough to pay the debt in full before the CSED runs. The amount available to pay may be as low as zero. At zero, the taxpayer qualifies for non-collectible status. These two options aren’t the same as an offer in compromise, because the taxpayer may have assets the IRS isn’t interested in that may be countable in an OIC, and/or the taxpayer’s income situation may go up in the future and the IRS is aware that it may do so.

Other common options used to reduce the debt include bankruptcy, penalty abatement and offers in compromise based on “equity”.

If the debt is incorrectly calculated, there are legal methods available to challenge it.

Third Step – Apply Facts to The Law (analysis)

There are a number of “facts” that have to be reviewed and applied to the law/rules in order to properly determine the best IRS debt option. The most important are:

• The amount of the IRS debt
• Whether the debt is correct
• Whether it can be challenged
• Where the debt is in the IRS’ collection process
• The taxpayer’s income, budget and asset situation
• The taxpayer’s “other debt” situation
• The collection statute expiration date
• Whether there are missing returns
• Whether there will be more debt as result of the missing returns
• Whether it’s important to avoid an IRS lien notice

All of the above and more play a role in determining which option to use. And…sometimes what may be a best option today, may not be a best option down the road. Facts and circumstances change as do laws and IRS rules.

Because many taxpayers misunderstand the process and don’t undertake proper analysis before approaching the IRS, they often end up agreeing to something that doesn’t make sense given their situation. This can make the situation more difficult for the taxpayer.

EXAMPLE 1

Mr. Henry owed the IRS $45,000.00 related to several missing tax returns. He filed the returns, received the bill and immediately called the IRS and arranged an installment agreement to pay the debt in full over several years. The payment was difficult for him to make and the IRS recorded a lien notice which caused him problems when he tried to re-finance his mortgage a short time later. The payment and the lien issue became difficult and he sought help. He learned after the analysis was complete that:

a. He could have arranged a full pay installment agreement in way that would have avoided the IRS lien notice filing.

b. If he increased his health insurance coverage that he needed to do anyway and set up a payment plan on his federally guaranteed student loans, he would qualify for an offer in compromise, or at least a much smaller partial pay installment agreement amount.

c. That he could use chapter 7 bankruptcy to eliminate his large credit card debts that weren’t factored into his IRS payment plan making it easier for him to make the full pay installment agreement amount each month.

EXAMPLE 2

Ms. Fried had been struggling with a large/old IRS debt for a long time. In and out of payment plans, non-collectible status arrangements and a long period of IRS neglect during which the IRS didn’t contact her or try to collect the debt. Her income remained steady and with 2 years remaining on the CSED the IRS contacted her again. On paper she qualified for an IRS offer in compromise and the amount necessary to settle the debt would have been several hundred dollars over a 24 month period.

She had her situation reviewed by one professional who offered to help her with the offer in compromise for a reasonable fee. She got a second opinion from another who agreed an offer in compromise should work but pointed out that the offer process take several months, that it stopped the CSED “clock” and that she would likely be able to arrange a monthly payment a bit lower than the Offer in Compromise payment by setting up a partial pay installment agreement.

She chose to arrange the partial pay installment agreement. Not necessarily because the payment was lower but because the CSED only had 24 months on it and the payment plan, once arranged, wouldn’t stop the CSED clock. When the clock ran her large IRS debt was removed and her IRS liens released.

In 2011 and 2012 the IRS felt the need to make some changes in an effort to help Americans struggling with tax debt. Bankruptcy filings were up, and many people were still dealing with the effects of a serious economic downturn that began a few years earlier. These changes were primarily made to existing programs. The “fresh start” program wasn’t a completely new program as many taxpayers seem to believe, even now.

What Did the IRS Fresh Start Program Actually Do?

Changes to IRS Lien Treatment

The IRS relaxed lien filing criteria. It increased the amount at which it would record a lien notice from $5000.00 to $10,000.00.

It introduced something called IRS lien “withdrawal”. This was meant to help taxpayers not only remove the lien from the County Record in certain circumstances, but also to remove the history of the lien notice from the taxpayers credit report.

Learn more about IRS Lien Withdrawal here.

Lastly, in relation to IRS liens, it begin to allow taxpayers with up to $50,000.00 in assessed tax debt to avoid a new lien notice filing if the taxpayer set up a streamlined payment plan that paid the debt over time and allowed the IRS to take the payment from a bank account – auto debited. The previous threshold amount was $25,000.00 assessed. It also increased the time-frame to pay the debt back from 60 to 72 months.

Changes to IRS Full Pay Payment Plan

The IRS had always used a set of budget criteria prior to the Fresh Start Program, to determine the taxpayer’s ability to pay on the debt. That budget criteria was usually applied in a strict way. The IRS wouldn’t allow expenses that were outside of the IRS standards. The Fresh Start Program allowed IRS employees to use the taxpayer’s actual living expenses, even when they didn’t meet the standard budget, IF the IRS could be paid over 6 years/72 months or the remaining time on the collection statute expiration date – whichever was shorter. Since then, more changes have been made in relation to “full pay” installment agreements that have made it easier in certain circumstances to deal with the tax debt.

Changes to IRS Offer in Compromise

Allowable Budget Items Changes

The IRS began to allow taxpayers to include certain student loan payments, monthly payments on other tax debts (like state tax debt), and it increased the number of living expense categories it allowed and certain amounts allowed in the taxpayer’s budget. These changes to the allowable budget items made it easier for certain taxpayers to qualify for an offer in compromise.

Changes to “Multiplier”

When a taxpayer “qualifies” for an IRS offer in compromise, the IRS then takes a second step and multiplies “excess” income by 12 or 24 and adds the value of assets to that number. The result if the offer settlement amount. For example:

If the taxpayer’s “excess” income above the allowable budget were $250.00 per month, and the taxpayer’s asset value were $10,000.00, the IRS would multiply the $250.00 by 12 and add the $10,000.00 and the taxpay could pay the resulting number, $13,000.00 to settle the debt. If the multiplier used were 24, than the taxpayer would pay $16000.00 over 24 months.

The Truth About the IRS Fresh Start Program

The IRS Fresh Start Program has helped many to avoid IRS lien notice filings, it made it easier to obtain lien filing withdrawals in certain circumstances, and it helped some taxpayers settle debt in an offer in compromise.

However, it didn’t, as many believe even today, provide a new debt settlement program for those with IRS Debt. That already existed when the IRS Fresh Start program was instituted.

And…despite the fresh start program, the vast majority of Offers in Compromise filed continue to be rejected. Most taxpayers end up in some form of installment agreement with the IRS and struggle with the debt over several years as a result.

It’s powerful.

So powerful in fact, that if you owe it more than 62,000… it can restrict your ability to travel.

Internal Revenue Code Section 7345 provides the IRS the power to do this.

Most people who owe the IRS a substantial amount of money right now, have already received a CP508C letter or a “Notice of Certification of Seriously Delinquent Federal Tax Debt to the State Department”.

This letter lets the Taxpayer know that the IRS is going to tell the State Department so that it can implement the restrictions.

If you’re a “world traveler”, don’t panic yet. There are a few ways to prevent this from happening.

Pay the debt below the threshold

The passport punishment is limited to those with debt above this threshold who’ve previously been sent a lien notice or a final notice of intent to levy.

If your debt is close to this amount or you can otherwise pay it down to this amount…you can do so and prevent the loss of your ability to travel.

File an appeal to a final notice of intent to levy or notice of lien

If you’ve received the final notice from the IRS regarding levy or lien you have 30 days to file an appeal. Filing the appeal stops the passport revocation process. Appeals sometimes take several months and you can use the process to finalize one of solutions below.

If you don’t recall receiving a final notice, check with the IRS or have a professional do a review.

Arrange an installment agreement or non-collectible status agreement with the IRS

Setting up an installment agreement or getting on non-collectible status kills two birds with one stone. It stops IRS collection activity like levy and garnishment, but also protects your passport.

File an offer in compromise

An offer in compromise is the IRS’ way of settling debt for less than what is owed for those people it believes can’t afford to pay it in full within the time remaining on the statute of collection period.

The trick here is that the Offer in Compromise needs to be filed before the IRS issues the CP508C letter in order to prevent passport problems during the offer negotiation period…which can be as long as 18 months.

If the offer is filed after the CP508C letter is issued, the offer has to be accepted and finalized for it to prevent problems.

Challenge the debt amount

The debt the IRS claims you owe can be wrong and often it is.

If you believe that the result of an audit is incorrect or if the IRS has filed returns for you, your debt is likely incorrect and overstated.

It might make sense to challenge the IRS’ incorrect returns or ask the IRS to re-consider the audit just because the debt is incorrect…but doing so may end up reducing the debt below the $51,000.00 threshold and save or restore your passport as well.

Use Bankruptcy

In certain situations, bankruptcy discharges or wipes away your obligation to pay tax debt.

Chapter 7 is ideal here because the discharge takes place just several months after filing… as opposed to the chapter 13 which takes 3-5 years.

Innocent spouse relief

Once an innocent spouse claim has been filed and processed, the IRS can’t take the passport.

REVIEW:

The key to preventing the taking of your passport is to know what your options really are. This usually requires some evaluation/analysis of your financial situation and history. If your’e concerned about losing your passport, it’s time to have a professional do that evaluation/analysis and help you decide on a solution.