Kinder, Gentler Tax Collections

Watch television long enough and you’ll eventually find someone touting their ability to solve tax debts for “pennies on the dollar.” Pay very close attention (and get out a magnifying glass) and you’ll also find the fine-print disclaimer stating that such results are unusual and not to be expected.  Although settling a $50,000 tax debt for $2,500 is a tax professional’s rare pleasure, such reductions in tax liability are more often the result of correcting taxpayer-errors than heated negotiation with the IRS.

The IRS has, however, made some meaningful changes to ease the burden on those owing back-taxes.  Today, I will discuss recent changes made to the IRS’s Streamlined Installment Agreement Program.  I will also share two other tools Professionals use to help taxpayers pay and reduce their tax debts: the Offer in Compromise, and the Partial Payment Installment Arrangement.

Installment Agreements Made Easier: On January 20, 2012 the IRS increased the upper limit for taxpayers who will qualify for the Streamlined Installment Agreements Program from $25,000 to $50,000.  It also added a full year for qualifying participants to pay their back-taxes by increasing the maximum repayment period from 60 to 72 months.  Although the liability threshold and repayment period have increased, certain requirements must be met to qualify. These requirements vary based on the amount of back-taxes owed.

Tax Debt $10,000 or Less: Generally, individual taxpayers requesting an installment agreement will not be turned down if they: 1) Owe less than $10,000, 2) Have filed their tax returns on time and paid all taxes due for the previous five years, 3) Agree to pay their tax debt in full within three years, and 4) The IRS agrees they need additional time to pay.

Tax Debt $25,000 or Less: Those who owe $25,000 or less in back-taxes and do not qualify for a “guaranteed” installment agreement may qualify for the Streamlined Installment Agreement.  The agreement is requested by completing Form 9465.  If accepted it will give taxpayers up to 72 months to pay their back taxes.  Although this request can be refused by the IRS, it will generally be accepted if all tax returns have been filed and the taxpayer has not defaulted on a previous agreement.

Tax Debt $25,000 to $50,000: The changes mentioned above have made it possible for those owing from $25,000 up to $50,000 to also qualify for a Streamlined Installment Agreement.  The agreement is requested by completing Form 9465-FS and will give taxpayers up to 72 months to pay their back taxes.  Although applying is a bit more complex for those who owe this amount of back-taxes, it is much simpler than before.  Calculations must be made to determine whether the taxpayer can meet their payment obligation for the up-to 72 month period.

Offer in Compromise: An Offer in Compromise (OIC) occurs when a taxpayer offers less than total tax due to settle a tax deficiency.  Although a valuable tool for the Tax Professional, successful OIC are relatively rare.  The IRS criteria for those who qualify is so narrow that, based on raw historical data, only about 20% accepted.  OICs can also take many months to craft, submit, and guide through the application process.  As a result, one of the primary tasks of the tax professional is to determine which taxpayers will make successful Offer in Compromise candidates.

Partial Payment Installment Agreement: Tax professionals have a third tool to help taxpayers called the Partial Payment Installment Agreement (PPIA). The PPIA contains aspects of both the Installment Agreement and the Offer in Compromise.  Like an Installment Agreement, an agreed-upon payment amount is made each month.  But, these payments are only made until the ten-year collection statute expires.  Any balance remaining after the statute has expired is extinguished as uncollectible.

Today I have discussed recent changes made to the IRS installment agreement program and shared two other options available to taxpayers who owe back taxes.  I did not, however, discuss many of the requirements and limitations of these options or any other factors that may influence your situation or payment strategy.  As always, remember that this (or any) article does NOT constitute tax advice.  If you have questions or need assistance, please feel free to contact our office if you wish to speak with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.