The Internal Revenue Service (IRS) has been given the authority by the United States federal government to collect federal taxes which are used to fund the activities of the government. If taxpayers fail to pay taxes the IRS can: garnish wages, repossess personal or business property or place levies on taxpayer’s bank accounts.
Minnesota taxpayers who owe IRS back taxes may be able to stop the IRS collection efforts by using one of the IRS tax settlement options to repay or “settle” their federal tax debt. The Internal Revenue Service may be willing to negotiate with Minnesota taxpayers if negotiations will enable taxpayers to pay their future federal tax debts.
Any Minnesota taxpayer who is considering an IRS tax settlement option should contact a tax professional such as an enrolled tax agent, certified public account or tax attorney who can provide details about available options for Minnesota taxpayers.
Offer in Compromise
One of the most popular IRS tax settlement options is Offer in Compromise or OIC. Offer in Compromise allows Minnesota taxpayers to make an “offer” or payment they agree to pay for their IRS back taxes. If the IRS accepts the settlement offer it is considered a “compromise” and the amount outlined in the OIC agreement, once paid, will settle the taxpayer’s debt. In certain cases, the Internal Revenue Service may be willing to accept less than the total amount owed.
The Internal Revenue Service accepts approximately 25% of the initial OIC offers, but may be willing to work with Minnesota taxpayers to negotiate an agreeable settlement offer. Offer in Compromise can be expensive, time consuming and may require Minnesota taxpayers to send large amounts of financial data to the IRS. If the OIC is denied, the IRS may use the detailed information to continue their collection efforts.
Qualifying for Offer in Compromise
Not all Minnesota taxpayers will qualify for an Offer in Compromise. To qualify for an Offer in Compromise a Minnesota taxpayer will need to meet one of the following conditions:
- Doubt as to Liability- In some circumstances there may a question about the accuracy of the tax liability assessed against a Minnesota taxpayer. If the Internal Revenue Service agrees or determines there is some validity to the taxpayer’s claim, they may accept an Offer in Compromise. This condition is not frequently met.
- Doubt as to Collectibility- Under this condition the amount of tax debt is not in question, only the Internal Revenues Service’s ability to collect the outstanding tax debt. The IRS may also determine the cost to collect the IRS tax debt is too high and accept an OIC.
- Effective Tax Administration- Minnesota taxpayers who can not repay their IRS debt because making the payment would cause an “economic hardship which is unfair and inequitable” may be able to qualify for an OIC. The Internal Revenue Service mainly grants an OIC under this condition to the elderly and the handicapped.
Minnesota taxpayers applying for an Offer in Compromise must also complete the following:
- Minnesota taxpayers must pay all of their future IRS taxes before or by the federal tax deadline for the next 5 years
- Minnesota residents must meet all of the Offer in Compromise requirements
- Minnesota taxpayers must submit their federal tax returns before the federal tax deadline
Installment agreements are the most popular method taxpayers use to repay tax debt. An installment agreement or IA allows Minnesota taxpayers to pay the total amount of the tax debt in monthly installments. Minnesota residents who owe less than $25,000 can usually qualify for an IA to pay their IRS tax debt over a sixty month time period. Minnesota taxpayers who owe more than $25,000 may want to talk to a tax professional who has experience negotiating with the IRS. It is always less expensive to pay IRS tax debt immediately to avoid penalties and interest.
The Internal Revenue Service can revoke an installment agreement for:
- Failing to meet the requirement of the IA. This can include not paying the monthly tax payments or not filing IRS tax returns.
- Failing to make the full payment amount. The IRS may give Minnesota taxpayers a grace period of 30-60 days for the first violation before revoking the IA.
- If the Minnesota taxpayer’s financial condition improves the IRS may revoke the installment agreement. A review of the IA will be done every 2 years by the Internal Revenue Service.
- Any Minnesota taxpayer who provides falsified or inaccurate tax data during the installment agreement application process may have their IA revoked.
Minnesota taxpayers who are considering an installment plan must meet the following requirements:
- All Minnesota taxpayers who are self-employed must file quarterly tax returns and make quarterly estimated tax payments.
- Minnesota taxpayers must ensure all tax returns have been filed.
- Minnesota taxpayers must pay the tax debt for the 5 years before the tax liability which can not be paid.
- Minnesota taxpayers can not have made another installment agreement with the Internal Revenue Service with in the last 5 years.
Partial Payment Installment Agreement
Minnesota taxpayers who can not pay all of their taxes and who do not want an Offer in Compromise, may be able to make partial payments under a partial payment installment agreement or PPIA. PPIA allows Minnesota taxpayers to make monthly IRS tax payments, but unlike the installment agreement, the full amount of the debt is not paid. If the Internal Revenue Service agrees to the PPIA, the IRS debt which is not paid will be forgiven.
The PPIA can be less expensive and less time consuming to implement than an Offer in Compromise. One benefit of the PPIA is that it will stop the collection efforts of the IRS, but the downside is the penalties and interest will continue to accumulate. The Internal Revenue Service will review the PPIA every two years and may increase the amount of payments required. If the Minnesota taxpayer’s financial situation improves the PPIA may be terminated. It is always less expensive to pay the full amount of IRS tax debt in one lump sum.
Currently Not Collectible
Under certain conditions, Minnesota taxpayers may not be able to pay their tax debt. If the IRS agrees, they may determine the tax debt is currently not collectible. Currently not collectible status will stop all IRS collection activities including wage garnishments and IRS tax levies. If a Minnesota taxpayer’s IRS tax debt is considered currently not collectible, the IRS will send a notice each year outlining the full amount of tax debt owed. If the IRS considers the tax debt currently not collectible for over ten years and does not attempt to collect the tax debt, the statute of limitations will expire and the IRS tax debt will be forgiven.
Minnesota taxpayers may be assessed penalties if they fail to file their Internal Revenue Service tax returns, request a false refund or report incorrect tax information. The Internal Revenue Service may be willing under certain conditions, to abate or reduce the penalties owed. The IRS will only remove the penalties with good reason. Reasons may include: poor physical health, personal duress, disaster, or poor advice from a tax professional.