The Internal Revenue Service (IRS) has the authority from the federal government to collect taxes. These taxes are used to fund the activities of the federal government. If Illinois taxpayers fail to pay their federal taxes, the IRS has the ability to use a variety of aggressive collection techniques (wage garnishment, repossession, bank levies) to ensure the taxes are collected.
The IRS has created a variety of IRS tax settlement options to help taxpayers pay their taxes. In many cases, the IRS may be willing to accept far less than the total amount owed. The IRS will do this to if they believe it will help the taxpayer pay their future tax debt. All Illinois taxpayers who are considering an IRS tax settlement option should contact a tax professional for help.
Offer in Compromise
Offer in Compromise (OIC) is one of the most common IRS tax settlement options used to pay IRS tax debt. Illinois taxpayers can make an offer to the IRS and the IRS has the option to accept or deny the OIC offer. The IRS denies most OIC offers, but may be willing negotiate. If the IRS accepts the OIC offer and the taxpayer meets all of the OIC requirements, the back tax debt will be settled. Penalties and interest will continue to accrue until the OIC is accepted by the Internal Revenue Service.
Offer in Compromise can be complicated and time consuming. The IRS will request detailed information from the taxpayer; information which later can be used to continue collecting tax debt. Offer in Compromise is one of several IRS tax settlement options available and may not be the best option for all Illinois taxpayers.
Qualifying for Offer in Compromise
Illinois taxpayers who are considering an Offer in Compromise must meet one of the following conditions.
- Doubt as to Liability- If the IRS makes a potential miscalculation or if the Illinois taxpayer has additional information which may prove the IRS assessed the wrong amount of tax debt, the IRS may be willing to accept an OIC offer. This does not occur often.
- Doubt as to Collectibility- If the IRS believes they will be unable to collect the debt now or in the future or if collection of the debt may be too high, they may be willing to accept the OIC. The amount of debt is not in question.
- Effective Tax Administration- There may be some Illinois taxpayers who are unable to pay their tax debt because payment would cause a hardship which is unfair and inequitable. The elderly and handicapped most frequently meet this condition.
The following tasks must also be completed for an Offer in Compromise:
- All federal tax debt must be paid by the Illinois taxpayer before the federal tax deadline for the next 5 years.
- All OIC requirements must be met by the Illinois taxpayer.
- All federal taxpayers must complete and submit all federal tax returns by the tax deadline.
Illinois taxpayers who do not want to use an OIC or who do not qualify for one may be able to use an installment agreement to settle IRS tax debt. Installment agreements allow an Illinois taxpayer to pay all of their federal tax debt in monthly installments. For Illinois taxpayers who owe $25,000 or less, the IRS is generally willing to allow an installment plan. The debt must be repaid within 60 months. Illinois taxpayers who owe more than $25,000 should contact a tax professional for help negotiating an installment agreement.
Installment agreements will not stop penalties and interest from accruing on the outstanding IRS debt. It is always less expensive to pay federal debt immediately. IRS collection will stop while the installment agreement is active. The IRS can end an installment agreement for a variety of reasons including any of the following:
- Failure to pay all of the monthly installment payments.
- Failure to file federal tax returns.
- Paying less than the required monthly installment payment amount. The Internal Revenue Service may give first time violators 30-60 days to make the payments.
- An Illinois taxpayer’s financial condition substantially improves.
- Providing false financial information to the IRS during the installment agreement application process.
Illinois taxpayers must meet the following requirements:
- Illinois taxpayers who are self-employed must file quarterly tax returns and make quarterly federal tax payments.
- Illinois taxpayers must file all of their federal tax returns every year.
- Illinois taxpayers must pay their taxes for the 5 years before the IRS tax debt which can not be paid.
- Illinois taxpayers can not have made another installment agreement with the Internal Revenue Service within the previous 5 years.
- The Internal Revenue Service will review the Illinois taxpayer’s financial situation every 2 years.
Partial Payment Installment Agreement
Illinois taxpayers who are unable or do not want to use an OIC or an installment agreement may be able to use the partial payment installment agreement (PPIA) to settle IRS tax debt. The PPIA is different than the installment agreement because the full amount of tax debt is not paid, only an agreed upon payment amount. The debt not paid is considered settled. A partial payment installment agreement is less expensive and easier to implement than an OIC agreement.
Partial payment installment agreements will stop IRS collection efforts. Penalties and interest will continue to accumulate on the outstanding IRS tax debt. The partial payment installment agreement will be reviewed every two years. If the Illinois taxpayer’s financial situation improves the PPIA may be altered to increase payments or cancelled.
Currently Not Collectible
If the IRS determines they can not collect an Illinois taxpayer’s tax debt, they will change the tax debt status to “currently not collect”. Penalties and interest will continue to collect under this condition but the IRS will cease all collection actions.
Written notice will be sent annually to the Illinois taxpayer to notify them of their existing IRS debt. The notification is not a bill. If the Internal Revenue Service does not collect the tax debt within 10 years, the debt will expire.
The Internal Revenue Service will assess penalties to Illinois taxpayers for a variety of reasons including: not paying taxes, not filing a tax return or requesting a false tax refund. Illinois taxpayers who owe penalties may be able to request a penalty abatement to reduce or eliminate tax debt. Penalties will not be abated without a valid reason. Reasons may include: serious mental or physical health conditions, disasters, high medical expenses, false information from a tax professional or personal duress. There may be certain penalties the Internal Revenue Service will not be willing to abate.