Two things in life are certain: death and taxes. But, there is no reason to let taxes or the IRS scare you to death. Thankfully, there are numerous options available for resolving tax issues with the IRS that don’t require going to court.
If you receive a letter, there are a few things you must remember. Do not run. Do not hide. Do not ignore the letter. Reach out to the IRS, an attorney, or a CPA to see what your options are, but do not ignore the letter. With a letter or with any communication from the IRS, your options are significantly improved if you address the issue early on. But, if you choose to contact the IRS directly, ensure that you are calling a number provided on the official IRS website, irs.gov, and verify with the IRS representative that the letter or communication is legitimate.
Early in the process a taxpayer may be able to resolve the tax issue by filing amended returns or providing supplemental documents which support the deductions claimed or income excluded. Generally, the IRS first sends the taxpayer a letter stating that they are planning to assess additional taxes unless the taxpayer responds within a certain period, usually 30 days.
Once you confirm the IRS has received your additional paperwork in response to the original inquiry, it becomes a waiting game. A taxpayer may wait for months before hearing back from the IRS.
When the IRS does respond, you might decide that you agree with the assessment or that you want to settle. A taxpayer who ignored the letter, may wish to settle to stop the IRS from garnishing their wages, levying their bank accounts, or filing a tax lien on their home or their car. Note that prior to considering any settlement, the IRS requires that a taxpayer provide them with up-to-date financial information and that the taxpayer file or have filed the last five years of tax returns.
Many taxpayers settle their tax debt by negotiating an Installment Agreement with the IRS. These agreements are similar to commercial payment plans in many ways. A taxpayer pays a fixed amount per month, generally ending at 10 years from the date of assessment. This 10-year period is based on the Collection Statute Expiration Date (“CSED”) which starts to run from the date of assessment. Installment Agreements can be a viable option for a taxpayer so long as they stick to the terms of the agreement and make payments on time every month.
Other taxpayers choose to file an Offer in Compromise (“OIC”) with the IRS. As the name implies, this is a request for IRS to settle for some specified amount, often substantially less than what the IRS claims a taxpayer owes. However, this specified amount is not all the taxpayer agrees to give the IRS in the OIC. In filing an OIC, the taxpayer agrees to allow the IRS to withhold any tax refund the taxpayer would otherwise be entitled to receive while the IRS is considering the OIC. Generally, this means the IRS is entitled to withhold a taxpayers refunds for the next year or two. The withheld refunds are in addition to the specified amount the taxpayer agreed to pay. This stipulation is not negotiable. It is included in the OIC forms which a taxpayer must file for the OIC to be considered.
It often takes the IRS more than a year to process a taxpayer’s request for either an Installment Agreement or an Offer in Compromise. As stated above, the IRS has 10 years from the date of assessment to collect on the debt based on the CSED, but the clock on those 10 years is paused, or “tolled”, while the IRS processes the taxpayer’s request. Please note: the CSED corresponds to each assessment of tax. If the IRS assesses a taxpayer multiple times for the same tax year, which does happen, then the taxpayer has multiple expiration dates to monitor. If you need to file an Installment Agreement or an OIC, you should reach out to an attorney or CPA for help.
A taxpayer who is struggling financially may be eligible for “Currently Not Collectible” status. This means the IRS agrees to suspend collection efforts until the taxpayer is able to make payments on the debt. To qualify for this status, the taxpayer must update the IRS yearly on their financial condition.
While the CSED is not tolled while you are designated as “Currently Not Collectible”, a taxpayer must be in very difficult financial shape to qualify. It is intended as a benefit for those suffering a financial hardship, not a status to strategically aim to achieve.
Dealing with the IRS is an extended waiting game, requiring patience. However, that patience may be rewarded with a favorable result in the end. While no one wants to deal with the IRS, it is comforting to know that there are options available and professionals ready to help.
Braden Fraser is an attorney with Ogden Murphy Wallace, PLLC working with tax, transactional, estate planning, municipal and other legal issues.