If you own a business and that business has value, many people would assume that it should be included as an asset in calculating the amount of settlement. As a result, many offers are calculated much higher than they should be.
Income producing assets in an IRS Offer in Compromise shouldn’t always be fully included in the calculation of “reasonable collection potential”.
When an Offer in Compromise is submitted to the IRS and that taxpayer owns business assets that produce income, it’s correct to adjust the income or the expense calculation to account for any loss of income if the asset were liquidated or used as collateral to secure a loan for purposes of funding the offer.
This analysis may even include a rental property.
The Internal Revenue Code defines rental property as a real estate trade or business. Rental property is important to the production of income where it is actually being rented. If the IRS were to treat the equity in the rental property as an asset for Offer in Compromise calculation purposes, it would then need to reduce the income from that rental property as well.
The reason so many people get this calculation incorrect is because the IRS forms 433A and 656 don’t specifically ask if any business assets are essential to the production of income. Most offer in compromise “filers” simply add both the asset value and the income stream from the asset to the disclosures in 433A and to the calculation in the 656 form as a result.
When they do this, the IRS gladly accepts. It won’t catch the mistake and fix it. It definitely won’t make the argument for the taxpayer either.
If you own rental property or a business and have significant tax debt, keep in mind that the Offer in Compromise must take the above into account. The documents should contain and the argument must be made that either the equity should be excluded or the stream of income should be excluded from the income producing business asset when calculating a settlement amount in an Offer in Compromise.
The very first thing I do when a person with a large tax debt balance hires me, is to calculate the IRS Collection Statute Expiration Date or CSED for short.
I calculate the clock.
Why do I care so much about this bit of information and write about it all the time? I mean come – on….blah blah blah – clocks are boring.
If you read this blog, I understand what you are feeling. Lots of talk about clocks and time. REALLY BOOORING.
BUT…If you have a tax debt that has been lurking around awhile – these articles about the CSED should be interesting and for some of you, actually exciting…old clocks and all.
Let me explain by category…once again.
CSED and Offer in Compromise
An IRS offer in compromise is as it sounds. It’s a formal process that allows you to try to make a deal with the IRS and settle the tax debt. There are two primary reasons why the CSED makes a difference in relation to the IRS offer in compromise.
Number 1 – The CSED Determines Whether You Will Qualify
Can you read that aloud again so that all can hear.
I mean really…what’s more important than “whether you will qualify”.
So…it goes like this; The IRS gets to determine how much money you need each month to survive. It starts with these things called IRS Standards or IRS National Standards and works it’s way up from there, deciding whether to add to the budget with your claims about child support, and tuition and 401k loans and credit card payments etc. etc.
It then looks at your income. What it has been, what it is, what it will be, and makes a decision about what it thinks you income will be.
It then subtracts one from the other and comes up with a number.
It takes that number and MULTIPLIES IT BY THE CSED. Example: Number = $500.00 and CSED = 100. or $50000.00
The IRS then calculates your asset value. Example: $50000.00.
The two are added and called the “reasonable collection potential” or RCP. The RCP is compared to the debt amount. Example: Debt Amount – $75000.00
RCP – $100,000.00
DEBT – $75,000.00
The offer in Compromise fails because the RCP is greater than the Debt. BUT what if the CSED were only 20 months. Would the RCP have been less than the debt? Yes.
Number 2 – The CSED Tells you whether you should bother with the OIC
Once you understand how offers in compromise are calculated and what the CSED is and WHY IT’S SO IMPORTANT…you begin to see that sometimes you can just be wasting your time. Pun intended.
Example – Waiting out the clock
Mr. Wonderful owes the IRS a big bucket of money. He owns a home that has $150,000.00 in “quick-sale” equity, but he can’t borrow against it because he has bad credit, primarily due to the IRS’ lien but also because he buys too many suits and steak dinners on credit.
The IRS wants to get paid, but realizes he can’t borrow against the home. So, it agrees to put him in a partial pay payment plan, or a plan that doesn’t pay the entire debt off before the CSED is over. It does this because it agrees he can’t afford to pay more than that every month.
There are 4 years left on the CSED and he is paying the IRS $100.00 per month. If everything stays the same, he will have paid the IRS $4800.00 over the next 4 years and his home will have increased in value. IF he files an offer in compromise, the offer amount will have to include the quick-sale value of his home and the CSED will stop running while he is in the offer.
When he comes out the other end and is unsuccessful…the CSED will be waiting where it was left. Mr. Wonderful chooses to stay in the payment plan. Not Dumb.
CSED and BANKRUPTCY
Much of what was written above applies here as well. I won’t simply repeat it…thank goodness right?
But…be aware that the CSED matters in other ways as well when it comes to bankruptcy. The most important way it matters is in it’s calculation. No…not in calculating the bankruptcy, but in calculating the CSED. Why? Because the CSED stops running when you are in bankruptcy. Sometimes over a 10 year period people file for bankruptcy more than once.
People call me and say…”hey Mike, I have this really old income tax debt and the IRS just levied my account. I read about this CSED thing and I don’t understand why they are still collecting on me”. My response…”have you ever filed for bankruptcy?”
The bankruptcy is often the problem. What if a chapter 7 bankruptcy was open for 2 years? Understanding how that affects your CSED is important.
CSED and PAYMENT PLANS
There are several areas where the CSED and the calculation of an IRS payment plan intersect, but the most common way is when a person owes the IRS less than $50,000.00 and wants to avoid filing a 433 financial statement. IF the CSED has 72 months or more left on it, the IRS will usually agree to simply divide the debt by 72 months and put that person into a “streamlined” payment and IF no lien notices have yet been filed it won’t file them.
But what if the CSED only has 40 months remaining. Will the IRS still allow the payment over 72 months? No. It should allow it over 40 months.
What if the debt is $50,000.00 even. Over 40 months that’s $1250.00 per month. Over 72 months – 695.00. Which would you prefer?
In a strange way, higher income earners with less than $50,000.00 in tax debt want the CSED to be longer…usually.
We hinted at another example above. The Partial Pay scenario and Mr. Wonderful.
To re-state it a bit.
In certain circumstances – the CSED can really hurt. Even if the payment plan you negotiate with the IRS is “small”. If the CSED is large, you run a much greater risk of problems. TIME isn’t your friend.
Example – Partial Pay vs. Chapter 7 Bankruptcy
Ms. Nositall owes the IRS $30,000.00 as a result of some unpaid taxes on a cashed out retirement plan. She has long since spent the money and has taken a job making $25.00 per hour. She isn’t a good offer candidate based on the RCP, but she has been able to convince the IRS to put her into a monthly payment of $395.00 per month. It’ painful, but better than a wage garnishment. THE PROBLEM is that she has 6 years remaining on the CSED and she plans on making more money at this job in the coming year and beyond. She is also struggling to pay some credit card debt. She speaks to her attorney and learns that when the IRS sees the higher income (new w-2 or tax return) it will want to re-negotiate the payment plan and bump it up quite a bit. She qualifies now to file a bankruptcy, and the entire tax debt qualifies to be discharged along with her credit card debt. Her choice: Bankruptcy.
Clocks are important and sometimes interesting. They keep track of time… and if you have a large tax debt, time is of the essence.
The fact that you may be able to pay the tax debt off quickly, leads me to believe that you may not have been a good Offer in Compromise candidate in the first place or that you didn’t plan your case right.
If I had reviewed your financial situation before you filed it I may have told you that, or I may have found a few ways to legally increase your budget or deal with asset values so that you would have made a better Offer in Compromise candidate. I also may have suggested that you negotiate a payment plan while letting the clock continue to run out on the statute of limitations period, or discussed bankruptcy with you.
In any event, you are entitled to appeal the rejected Offer in Compromise if you do so within 30 days of the initial rejection. Doing this will buy the time to have an experienced tax attorney look at the entire situation and help you challenge the rejection or find another more viable method for dealing with the debt that may even include…paying it in full.
Tax Debt and High Income? Bankruptcy may be the solution
More than 1 million people each year file for bankruptcy in the United States. That number always incudes some famous types. Yes famous and “important” people use Bankruptcy. In fact many people are shocked when they see the long list. My list of favorites include:
President Abraham Lincoln
President U.S. Grant
Johnny Unitas (yes I know..even Unitas)
Dionne Warwick has recently joined the list. You can read more about her bankruptcy filing here.
Ms. Warwick filed her Chapter 7 Bankruptcy case in New Jersey. Some important and interesting disclosures at least for our purposes…include the following:
Gowns and Clothes $5000.00
Fur Coats and Diamonds $13000.00
Pension Plan unknown
Wages $5000.00 per month
Social Security Income $2200.00 per month
Pension $14000.00 per month
Royalties $1000.00 per month
Rent $5000.00 per month
utility costs $2100.00 per month
home maintenance $1000.00 per month
Laundry and Dry Cleaning $750.00 per month
Transportation costs $1000.00 per month
House keeping $5000.00 per month
Personal Assistant $4000.00 per month
She listed more than $10,000,000.00 in debt, mostly owed to the IRS and the State of California. Much of it more than 15 years old.
The schedules are interesting to a boring attorney who deals with debt problems for a living, but they should also be of great interest to anyone in Arizona who has serious tax debt.
There are a number of reasons why:
1. Income Tax Debt and some other types of tax debt are dischargeable in Bankruptcy
I find myself repeating this on a constant basis. YES…the obligation to pay income tax debt can be discharged or wiped away as a result of a bankruptcy filing depending on the “circumstances”.
The basic circumstances are those related to dates. The tax debt in question has to be based on a tax return that was:
a. due to be filed more than 3 years before the bankruptcy filing
b. actually filed by the person and not the IRS more than 2 years before the bankruptcy
c. assessed or entered into the IRS’ books more than 240 days before the bankruptcy filing
The point…? If the tax debt meets the criteria for discharge, bankruptcy has to be considered. Ms. Warwick considered it.
2. IRS Offers in Compromise Don’t Always Work
Whenever serious tax debt exists, the question immediately becomes… will the IRS settle the tax debt for less than what I owe? For some people yes…for most people no. There are a number of reasons why. The basic explanation as to why many people don’t qualify for an Offer in Compromise is as follows:
Whether you meet the initial criteria to settle tax debt depends on a set of rules. Negotiating an Offer in Compromise isn’t like trading a horse for 3 bags of seed.
The first rule is that your excess income plus your assets cannot be large enough to pay the tax debt over the time remaining in the statute of limitations period for collection of the debt.
The IRS has 10 years from assessment to collect the debt. That 10 years can be extended for any number of reasons. The clock doesn’t start to run until the assessment date which is often delayed because the returns aren’t filed on time. Time in tax court, time in certain appeals, prior offers, prior bankruptcies all extend the 10 year clock as well. Some of this probably explains why Ms. Warwick’s IRS debt is so old and still in existence.
The second rule is that the IRS gets to use a budget to calculate the excess income that is it’s own…and not necessarily Ms. Warwick’s real budget
There are other rules that govern how the actual offer amount is calculated…but these two rules weed lots of people out… all by themselves.
AND…even if the IRS imposed excess income number will leave less than the total debt over the remaining life left in the statute period, the IRS can reject the Offer for other reasons and they do it all the time. You will notice that some articles about her Bankruptcy mention her inability to make a deal with the IRS.
3. What you earn and spend…shouldn’t matter in an Arizona Chapter 7 Bankruptcy if the majority of your debt is tax debt
Bankruptcy law limits your allowable budget in an effort to determine how much you can afford to pay your creditors, much like the IRS does when you file an Offer in Compromise.
Many people fail this “Means” test. Ms. Warwick would not have qualified to file a chapter 7 bankruptcy either IF her debt were mostly credit card, mortgage and other consumer debt.
If you look closely at her schedules you will notice something important. Her form B22A which is typically filled out to prove to the Bankruptcy Court that you pass the means test and belong in Chapter 7 Bankruptcy…is mostly blank.
It is blank except for two small squares that are blacked out. The important square for this discussion is the square that “declares” that Ms. Warwick’s debts are primarily “non-consumer” debt.
She darkened this square because her tax debt… far exceeds her non-consumer debt. She knows that as a result, the means test doesn’t apply to her and she gets to file a chapter 7 bankruptcy.
She gets to file for bankruptcy even though she spends $2000.00 per month on utilities and has a driver, a housekeeper and a personal assistant.
The same is true for you in Arizona. No, you don’t get to hire a personal assistant…but you do get to qualify for a chapter 7 bankruptcy If you have tax debt that is the largest portion of all your debt.
IRS Offer in Compromise – Extensive preparation is key to success
I never met Mr. Bell. He passed away just a few years before my time. However, when I read about his life I come away convinced that he had his share of ups and downs and that those experiences helped him realize the importance of detailed preparation.
We have learned the same thing over the years. As a general rule, our clients are most successful when they are prepared to work with us in the detailed preparation of a case.
Doing it right the first time is not an easy task.
The IRS Offer in Compromise in particular requires a large amount of preparation.
Much more preparation is required than most of our clients realize when they initially contact us. The following is a list of the steps we take from beginning to end in an effort to make sure the case goes well.
Preparation begins with a phone call. Potential clients call and speak to me for 15 to 20 minutes for free and I ask them a number of questions about their finances. I do this to determine whether an offer in compromise may make sense i.e. to find out if there is anything that would preclude a person from even considering the Offer in Compromise as a way to substantially reduce or eliminate tax debt.
In Person Meeting
If we think we can help based on the information gathered during the phone discussion, we meet in person. The potential client brings a number of items to that meeting including some pay history, tax history, budget, asset list, debt list and a good memory if they have one.
Additional questions are asked, goals are discussed, and some numbers are crunched.
This process will usually give us enough information that we can either solidify or change our original opinion about whether the Offer in Compromise will make sense or whether another avenue should be explored.
After the initial meeting, our clients will provide a stack of documents that may include profit/loss statements, tax return information, several months of paystubs, several months of proof of payment related to housing related costs, medical expenses insurance bills, secured debt payments, unsecured debt, other tax debt and related payments, bank accounts statements for several months, information related to assets and transfers of assets and other items.
While the client is providing the above we usually order and review IRS documents in order to find out when the IRS statute of limitations will run on the debts in question, whether they will be dischargeable in bankruptcy and when, whether they have been correctly calculated, whether there are missing returns, income information for years any returns are missing, penalty information in order to help determine whether penalty abatement might be an option etc.
When all of the above information has been collected and reviewed we typically meet with our client again and discuss whether the offer in compromise will make sense based on the situation as it stands or whether some changes may need to be made to budget or assets in order to better qualify. If a bankruptcy makes more sense we discuss this and why. If an IRS payment plan negotiation makes more sense, this is also discussed in detail.
If time permits, many clients undergo a period of “planning” in order to ensure that the case has the best chance of success. This planning period may involve the negotiation of an IRS payment plan to help avoid IRS collection activity. It often includes waiting for certain tax debts to become dischargeable in bankruptcy which may effect the Offer in Compromise, waiting for the filing of tax returns and for a specific amount of time to run out after assessment of the debt, making changes to budget, making changes to tax withholdings and asset items, making sure returns are filed and all estimated payments have been and are being made in order to make the offer in compromise work. These different planning options sometimes hold up the filing of the Offer for several months….on purpose.
Preparation of Final Documents
The documents provided to the IRS to qualify for an Offer in Compromise are typically thick. Proof of assets, values, income and most budget items must be provided and they must match the financial statement AND it all needs to make sense and be recent.
This process alone is time consuming and difficult for a client especially. Receipts and cancelled checks need to be kept and gathered and changes need to be minimized without first making a joint decision to make the change.
When the Offer packet is filed, it must include an offer in compromise request or form 656. It must also include a filing fee and the first payment if the client is paying the offer amount in installments OR a percentage of the offer amount if the client is proposing a cash offer. The IRS will review the “packet” and determine if it is “processable”. If not, it will typically ask for additional documents.
Review of Offer by Offer Examiner
When the Offer Examiner is reviewing the financial documents and if every item claimed isn’t backed up with enough proof and within the IRS guidelines, the Examiner will disagree with those aspects of the offer and counter OR reject outright.
The key is a completely planned and fully prepared offer packet that doesn’t allow the Offer Examiner to speculate, wonder or question.
The goal of thorough preparation is to avoid the necessity of appealing some aspect of the Offer Examiner’s response.
The best outcome is the acceptance of the Offer by the Examiner. This will only be achieved if a lot of preparation has taken place. There is no substitute.
I have complained in the past about the IRS Offer in Compromise program and with good reason. The vast majority of IRS Offers filed failed at a rate of more than 75% on average nationwide. For most people with serious tax debt the rules just didn’t apply. I saw the program as an IRS method to collect information and little else.
In May of 2012 however, the IRS surprised some people including me. It changed the rules regarding how Offers in Compromise are calculated. These changes will likely result in a higher success rate than before.
The following some important changes that may make a difference in the calculation of the Offer amount and will also likely result in a higher acceptance rate.
In the old days, the formula for determining a taxpayer’s reasonable collection potential looked something like this:
“Excess” Income x 48 + Plus Asset Value = Cash Offer
Now it is:
“Excess” Income x 12 + Plus Asset Value = Cash Offer
This change is big.
Taxpayer with $180,000.00 in tax debt and $5000.00 in net income post tax withholdings.
If the IRS agrees that the reasonable budget needed to live is $4300.00 per month and the value of all non-exempt assets is $5000.00:
The two formulas would look like this:
$700.0 x 48 + $5000.00 = $38,600.00
$700.00 x 12 + $5000.00 = $13,400.00
A difference of $25,200.00.
State Taxing Agency Installment Agreement
In determining the reasonable living expense budget the IRS has agreed to include a percentage of the monthly payment to a State Taxing Agency for delinquent tax debt. We are now including this percentage payment made to the State of Arizona as a budget item as a result.
3 REMAINING PROBLEMS
We find that there are a number of problems that exist in bringing a successful IRS Offer in Compromise to fruition. The 3 most important to understand are these:
The IRS is allowed to decide to a large extent the amount of money that the taxpayer should be living on. It uses a set of standards to determine the amount. See the IRS Standards here.
The problem? The budget used to determine the Offer amount is often not the budget the taxpayer is actually living on. The budget is often higher but is also often lower.
IRS maximum allowable budget: Two Person Household Budget – Phoenix, Az.
Housekeeping Supplies 66.00
Personal Care 55.00
Car Payments 1034.00
Car Upkeep/transport 582.00
Housing and Utilities 1834.00
Out of Pocket Med 120.00
Additional Items IRS will likely accept:
Out of pocket medical above standard of 120.00 per month (assuming 100.00 addl)
Health Insurance Monthly (assuming 450.00)
Term Life Insurance Monthly – reasonable (assuming 100.00)
Arizona State Tax Payment % – back tax debt long term (assuming 250)
Total Estimated Monthly Budget IRS Allows: 5299.00
Assume the following is true:
a. Taxpayer household nets $6500.00 post tax-withholding.
The IRS allowable budget total would be 5299.00 and that would be subtracted from 6500.00.
The difference…1201.00 would than be multiplied by 12 and that number would be added to the taxpayer’s non – exempt asset value. Assuming asset value of 0 the cash offer would be 14412.00
2. Statute of Limitations
Before any offer amount can be calculated, the IRS will look closely at the income and budget and it will multiply the difference between the two by the length of time left in the Statute Period for Collection which is 10 years from the date of assessment.
So assume the following about the taxpayer described above under Budget.
a. The tax debt is from the 08 tax year and it is related to a failed business.
b. The debt was assessed against the taxpayer in 2010 and there are 7.5 years remaining on the 10-year collection period.
c. The tax debt is 80,000.00
If the income and budget difference were 1251.00 per month and that were multiplied by 7.5 years the amount the IRS would believe it could collect before the statute ran would be 112,590.00.
As a result the IRS would never get to the issue of settlement and the Offer would be rejected.
Knowing a few things going into an Offer as a result will be very important:
– Tax debt amount
– Statute Period Remaining
– Highest and lowest possible “excess” income amounts
3. IRS Can Reject for other reasons
Just because you meet the criteria to make a successful offer in compromise from a financial standpoint, your offer won’t necessarily be accepted. The IRS rejects Offers in Compromise for other reasons.
In our office, every attempt is made to qualify a client for the IRS’ Offer in Compromise program. If it does not appear that it will make sense to file one, we fall back on using the IRS payment plan program in combination with the IRS Statute of Limitations Rule and/or bankruptcy to deal with the debt.
We typically don’t take a case unless we believe that with some planning, the client can substantially reduce or eliminate tax debt.
IRS Debt: The stuff of sleepless nights and serious regrets.
If you have a serious tax debt ,you may have some regrets and worse…you may feel as if there won’t be a viable solution.
I can tell you though that for many people with serious tax debt problems, there is hope. Many of my clients can attest that if you are willing to create a plan, and combine it with some patience and hard work, you can substantially reduce or even eliminate the debt.
The following legal methods are the most common ways we do it.
1. IRS Statute of Limitations
The time period the IRS has to collect is limited to ten years by 26 U.S.C Section 6502. The 10 year date is important, and we often use a payment plan or non collectible status to get to it.
Here is an example:
My client had a tax debt that had grown to $100,000.00 over the course of 7 years. He had been in and out of payment plans with the IRS. His tax debt had reached an age that it was dischargeable in bankruptcy but he didn’t want to file a bankruptcy. He would have “qualified” for an offer in compromise with the IRS as well.
However, he was going to retire and his income was going to drop in half. That reduction in income allowed him to negotiate a new and very small payment plan with the IRS of $50.00 per month. As his new income was not going to increase and his overall situation was going to stay substantially the same, he decided to finalize the payment plan negotiation and wait for 3 years.
At the end of the 3-year waiting period, he had paid approximately, $1700.00 toward the $100,000.00 debt, the remainder was wiped away and the IRS lien was released.
The above scenario is common, and much more common than you would think. In many cases it is wiser to “lay low” and let the clock run, than to take a more of a risk in terms of cost and file an IRS offer in compromise or a bankruptcy that will stop the statute of limitations clock from ticking away.
2. Challenge the Amount of the Tax Debt
The IRS assesses incorrect tax debts all the time. These incorrect assessments are typically the result of an IRS audit during which the taxpayer wasn’t able to prove the case or the creation of an incorrect return by the IRS because the original return was never filed.
Here are some options:
Appeal the Audit Result
IRS Audits can be appealed and they can be appealed all the way to the US Tax Court if the rules are followed. If you know that the IRS got it wrong, appealing the case may be the best option.
Appealing the IRS Substitute Tax Return
If the IRS files a return for you, it is usually incorrect, and often results in a debt that is larger than it should be. The IRS uses this incorrect debt to engage in collection activity.
These incorrect returns can be appealed as well. Most people don’t file the appeal on time, and in those cases a process called an “Audit Reconsideration” is used. The IRS will usually accept a correct return during the Audit Reconsideration process, and replace the incorrect return reducing or even eliminating the debt in some cases.
Trust Fund Recovery Assessment – It can be challenged
If you are signing checks, or making decisions about which bills should be paid for a business you can be held personally responsible for the trust fund portion of any employment tax the business should be withholding. If the IRS issues this assessment, you must consider appealing the decision or you will have a debt that is not dischargeable in bankruptcy and that is typically very large.
Innocent Spouse Relief – If you didn’t know you shouldn’t have to pay
Sometimes the spouse will hide some things from you like the fact that he or she didn’t disclose all of the income earned at the business on your joint return. There is often egal redress for the innocent spouse in these types of cases.
3. IRS Offer in Compromise
The US Tax Code at 26 U.S.C Section 7122 lays out the law regarding the IRS Offer in Compromise. The IRS Offer in Compromise is just the Government’s program for those it believes have little ability to pay all if the tax debt over a period of time. The amount the IRS uses to determine whether the debt can be paid or not, is called the “IRS reasonable collection potential”.
In the past, most IRS Offers in Compromise failed and they did primarily because the formula used to determine the reasonable collection potential was weighted in the IRS’ favor.
In May of 2012, the IRS changed the rules. We think that these rule changes will increase the number of successful Offers in Compromise. Anyone with serious tax debt should have an experience tax resolution attorney analyze whether an offer will make sense.
Many aren’t aware that bankruptcy can be a powerful option in dealing with IRS debt. Certain tax debts can be reduced or even eliminated in bankruptcy. bankruptcy.
The most important thing to understand about tax debt and bankruptcy is that the bankruptcy code trumps the IRS. If an offer in compromise doesn’t make sense, the taxpayer will often end up making unreasonable payments to the IRS on the debt over a long period of time. A bankruptcy must be considered in those instances.
An installment agreement is often used prior to the filing of a bankruptcy primarily in order to ensure that the date requirements for discharge of the tax debt are met. The Bankruptcy Code requires that the tax is based on a return that was due at least 3 years prior to the bankruptcy filing and that the return was filed by the taxpayer at least 2 years prior.
We have used bankruptcy to help our clients eliminate or substantially reduce millions of dollars in tax debt. For many, it will be the best option in the end.
5. Penalty Abatement
There are upwards of 140 IRS penalties and each one of them has an exception based on “good faith”.
The most common penalties we see are the failure to file and the failure to pay penalties. These can be removed even though you filed the return late and paid the balance late, if you acted in good faith and there was some reasonable basis for the failure.
Removal of these penalties can help in cases where the taxpayer will end up paying most of the debt in an IRS payment plan.
If the debt will be reduced in an IRS offer in compromise, or in a bankruptcy, the amount of the penalty is usually irrelevant and no request for penalty abatement is necessary.
You have some IRS debt and have figured out that if you can’t pay it, the IRS will collect it by seizing your paycheck, bank account etc.
You don’t want that to happen of course, and you’ve heard that the IRS may even agree to a payment plan or even a settlement of the debt, so you give the folks at the IRS a call.
A mildly impatient IRS collections employee answers after an eternity on hold. He asks you some questions and then asks whether you can pay the debt in full. You reply that you can’t, but would like to arrange a payment plan or even settle the debt.
‘Hold on a minute” he says, “I see here that you haven’t filed some tax returns, and even though you’re self employed, you haven’t made any estimated tax payments for several months”.
“We can’t discuss “negotiation” until you are “compliant. You have to file the missing tax returns and submit some estimated payments”. (If employed, you would need to correct your withholding amount).
You have to be willing to become “compliant” or in English…file the missing tax returns and or pay your tax with-holdings. If you don’t, there isn’t anything anyone can do to stop the IRS long term.
The IRS considers compliance the same as putting skin in the game or showing that you desire to live up to your end of the bargain. You don’t do it, they keep collecting.
If you have missing tax returns, get some help to figure out which returns need to be filed. If you haven’t been withholding get some help to figure out how much you should and start doing it.