On April 25, 2022 we posted Know Your Choices to Pay Your Tax Bill! - Part 1 where we discussed Paying in full within 120 days (short-term payment plan) and Installment agreements (long-term payment plan). In this Part 2we will discuss two other alternative for taxpayers who do not have the money to pay their current tax liability.Offer in compromise (OIC). An OIC is an agreement between a taxpayer and IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won't qualify for an OIC in most cases. IRS says that to qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. (IRS website)
IRS may compromise a tax liability on any of the following grounds:
- Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
- Doubt as to collectibility. Such doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
- To promote effective tax administration. An offer may be accepted on this ground if: (a) collection in full of the tax owed could be achieved, but (b) requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. (Reg. § 301.7122-1(b))
A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC).
The OIC application generally must be accompanied by a $186 application fee. However, the fee is waived for certain low income taxpayers or if the OIC is based on doubt as to liability. (Form 656-B, Notice 2006-68, 2006-31 IRB 105, Sec. 4.03)
Except with regard to offers filed by low-income taxpayers, or based only on doubt as to liability, an OIC must be accompanied by a nonrefundable payment that depends on how the taxpayer is offering to pay.
A taxpayer may propose to pay in a lump sum, i.e., an offer payable in five or fewer installments within five or fewer months after the offer is accepted. If such an offer is made, the taxpayer must include with the Form 656 a payment equal to 20% of the offer amount. This payment is required in addition to the $186 application fee.
A taxpayer may propose to make periodic payments, i.e., six or more monthly installments made within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment also is required in addition to the $186 application fee. (Code Sec. 7122(c)(1)
Currently Not Collectible - delay the collection process. Where a payment would create financial hardship, is to ask IRS to delay collection until the taxpayer is able to pay. If IRS determines that the taxpayer cannot pay any of his or her tax debt, it may report the taxpayer's account as currently not collectible and temporarily delay collection until the taxpayer's financial condition improves. Interest and penalties continue to accrue until the tax debt is paid in full. (https://www.irs.gov/businesses/small-businesses-self-employed/temporarily-delay-the-collection-process)
The taxpayer may be asked to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B) and provide proof of financial status (this may include information about assets and monthly income and expenses).
During a temporary delay, IRS will again review the taxpayer's ability to pay, and may also file a Notice of Federal Tax Lien to protect the government's interest in his assets.
Taxpayers requesting a temporary delay of the collection process or to discuss other payment options should contact IRS at 1-800-829-1040 or call the phone number on their bill or notice.
Remember to FILE YOUR RETURN,
Even if You CANNOT Pay Your Tax!
I know this is counterintuitive, since no one wants to bring attention to the fact that they cannot pay their taxes by filing a tax return showing a tax due and not paying the tax. However by filing your return,
- You begin the running of the Statute of Limitations for assessment & collection,
- You begin the running the two-year period for discharging this debt in bankruptcy and
- You reduce your associative tax return penalties from 5% a month for late filing to .05% for late payment penalty.
- The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
- If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.