Tax & Business Insights


Effective Payment Strategies For Tax Debt

Volume 8 Issue 6 -- November/December 1996

If you or your clients owe a tax debt, there are several basic approaches to paying it. For starters, if the amount is not in doubt and it can be paid over time, an IRS installment payment agreement may be in order. The Installment Agreement (Form 433-D) is signed by the taxpayer and an IRS collection supervisor, and is essentially a contract with the IRS which the Agency will honor if the taxpayer remains current (makes the monthly payments) and the financial status of the taxpayer remains essentially the same.

Usually the IRS asks for a Collection Information Statement, Form 443-A (for individuals) or Form 433-B (for businesses), in order to determine the financial status of the taxpayer. As might be expected, if there are substantial amounts of liquid assets or equity that can be borrowed against, the IRS will decline to enter an installment payment agreement. The amount of the monthly payments is, of course, negotiable and depends on the data shown on the financial statement.

Obtaining an installment agreement does not end the problem. Errant taxpayers frequently default (miss a payment) and often end up with forced collection efforts, levies and the like.

Not all installment payment agreements are created equal. Watch out for the "over-the-phone" installment payment agreements with the Automated Collection Service (ACS) Centers. ACS wants to do "everything" on the phone and record the same on a computer. If mistakes have been made in the telephone-data entry process, a taxpayer may think an installment payment agreement is in effect only to be surprised by a levy or lien. Moreover, ACS virtually always refuses to prepare Forms 433-D (Installment Agreement). The reasons for this are not clear, but common sense suggests that the existence of a signed agreement puts the taxpayer in a much better position.

What if the taxpayer believes the amount of tax allegedly due is incorrectly stated or he or she simply can't pay the tax (and isn't likely to be able to pay it in the foreseeable future)? Enter the Offer in Compromise.

Offers can be submitted to the IRS based on doubt as to "liability" (it isn't owed, or it is too large) or doubt as to "collectibility" (it can't be paid).

An offer can be made to the IRS if the underpinning of the tax is in doubt. Examples could be: (1) a petition to the Tax Court was not filed but the Notice of Deficiency was wrong, (2) the spouse was not a "responsible party" and failed to file a protest to the imposition of the civil trust fund (100%) penalty, or (3) the statute of limitations on assessments or collections has expired.

The situations in which such offers can be submitted are numerous and varied. What if the taxpayer is older, permanently impaired, or economically disadvantaged? If it appears, objectively, that the taxpayer will never be in a position to pay all of the tax, then a percentage of the total can be offered, if the underlying financial statements support the taxpayer's position.

As might be expected, there is room for subjective factors -- e.g., how long has the taxpayer been unemployed and what is the prognosis for the impairment if any, etc. There are a number of elements to consider when making an IRS offer:

- Is the taxpayer making installment payments now? If so, the IRS will capitalize the payments over five years and expect the taxpayer to offer at least the amount of the capitalized payments. For example, if the taxpayer is currently paying $200 per month and the IRS capitalization factor is currently 47 times one month's payment, the taxpayer has to offer at least $9,400 ($200 x 47), or more, before the offer will be considered.
- Offers to be paid by a non-liable party, such as Mom, Brother, Sister-in-law, often receive more favorable treatment. Why? The IRS is getting access to funds not otherwise available. The IRS manual tells Offer Specialists (O/S) to make sure they will collect from the taxpayer at least what is offered by the non-liable third party if the offer is rejected. Stated differently, take the "bird in hand."
- Don't offer zero. Even if the total amount due is legally in doubt (doubt as to liability), if any offer is submitted offering "zero" dollars, the offer will not even be processed. There seems to be a cadre of staffers waiting to reject the processing of offers. Legally it appears that an offer can be for "zero" dollars, but try to convince an IRS intake clerk of this theory. The better course of action is to offer some amount, even if it is believed nothing should be paid.
- Don't lie or let your client lie about assets. A lie detected will nullify the agreement and could, in extreme cases, lead to criminal prosecution.
- Remember all tax returns and payments have to be processed timely for the next five years or the Offer, if accepted, is subsequently revoked.

Note: Since this Newsletter was written, there have been significant developments in the rules governing Offers in Compromise. For the details, click here.


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