The Internal Revenue Service (IRS) has the authority to collect taxes for the federal government. If the IRS has reason to believe the full amount of tax debt is not collectible, they have the legal authority to settle the tax debt for a fraction of the full amount owed with an IRS tax settlement option. The IRS may be willing to settle tax debt for less than the full tax owed to avoid declaring a Michigan taxpayer’s debt as currently not collectible or having to negotiate a lengthy installment agreement.
Michigan taxpayers who are facing aggressive debt collection tactics by the IRS such as a repossession or wage garnishment should contact a tax professional such as an enrolled agent, certified public accountant or tax attorney to discuss the options for settling back tax debt with an IRS tax settlement option.
Offer in Compromise
One of the most popular types of IRS tax settlement options used by Michigan taxpayers is the Offer in Compromise. Offer in Compromise or OIC allows Michigan taxpayers to make an offer to settle their tax debt. The IRS may be willing to accept less than the full amount of tax debt owed. If the IRS accepts the offer, the tax debt outlined in the offer will be considered settled.
The IRS accepts approximately 25% of Offer in Compromise offers at the initial application level. More may be accepted after extended negotiations or a formal appeal. Penalties and interest will continue to accrue while the OIC is under consideration. If the Offer in Compromise is denied the IRS may use the detailed information they have gathered to continue their collection efforts. Offer in Compromise can be expensive, time consuming and complex. It is only one of several IRS tax settlement options available to Michigan taxpayers and it is not always the best.
Qualifying for Offer in Compromise
Michigan taxpayers who are considering an Offer in Compromise must meet one of the following requirements:
- Doubt as to Liability- Under certain conditions a taxpayer may be able to prove the amount of tax debt they have been assessed is incorrect. Taxpayers who can prove the examiner interpreted the IRS tax law incorrectly, all of their tax evidence was not considered or that more information has surfaced which can prove the tax calculation was incorrect may qualify for an OIC. This condition is not frequently met.
- Doubt as to Collectibility- This condition differs from the first in that the amount of tax debt is not in question, only the ability of the Internal Revenue Service to collect the debt. The IRS also may determine collection of the tax debt is too expensive. If either of these conditions is met, the IRS may accept an OIC.
- Effective Tax Administration- Some Michigan residents may suffer “an economic hardship which is unfair and inequitable” if they pay their IRS tax debt. If the IRS agrees they may accept an Offer in Compromise.
Michigan Taxpayers must complete the following tasks:
- Michigan taxpayers must pay all of their future tax debt on or before the federal tax deadline for the next five years.
- Michigan taxpayers must complete all Offer in Compromise requirements.
- Michigan taxpayers must submit all of their federal tax returns by the federal tax deadline.
Installment agreements (IA) are another popular IRS tax settlement option. Installment agreements allow taxpayers to pay all of their IRS tax debt with monthly installment payments instead of making one lump sum payment. Penalties and interest will continue to accrue until the payments are complete. It is always less expensive to pay IRS tax debt in a lump sum payment. Michigan taxpayers with debt of $25,000 or less can apply for an installment agreement to repay their tax debt within 60 months. Michigan taxpayers with IRS tax debt exceeding $25,000 should contact a tax professional for help negotiating an installment agreement.
The IRS has the legal right to revoke an installment agreement if the Michigan taxpayer fails to complete any of the following tasks:
- Failing to make all the required monthly installment payments or paying less than the agreed upon monthly payment amount. First time offenders may be extended a grace period of 30-60 days.
- Failing to file annual federal tax returns.
- The installment agreement may be cancelled if the Michigan taxpayer’s financial situation improves.
- Providing false information to the Internal Revenue service on the installment agreement application.
All Michigan taxpayers must complete the following tasks:
- All self-employed Michigan taxpayers must file quarterly federal tax returns and make quarterly estimated federal tax payments.
- Michigan taxpayers must file federal tax returns each year.
- Michigan taxpayers must pay their tax debt for the five years before the tax liability which can not be paid.
- Michigan taxpayers can not have made another installment agreement with the IRS with in the previous five years.
- A review will be done by the IRS every two years to analyze the financial status of the Michigan taxpayer.
Partial Payment Installment Agreement
A partial payment installment agreement or PPIA is available for Michigan taxpayers who can not pay the full amount of their tax debt with an installment agreement and who may not qualify for an OIC. The IRS may be willing to allow Michigan taxpayers to repay their federal tax debt with partial monthly payments. All debt which is not paid will be considered settled or forgiven by the IRS.
Penalties and interest will continue to accumulate during the PPIA payment period. It is always less expensive to make tax payments in full as soon as possible. The PPIA may be less expensive and less complicated than applying for an Offer in Compromise and it will also stop the IRS debt collection efforts such as bank levies, wage garnishment, and repossessions. The IRS will review the Michigan taxpayer’s financial status every two years and if they are able, the IRS may require increased PPIA payments or completely cancel the PPIA agreement.
Currently Not Collectible
Under some conditions the IRS may determine tax debt is not collectible and change the tax debt status to “currently not collectible”. Michigan taxpayers whose debt is labeled currently not collectible can avoid IRS collection actions. Each year the IRS will send a notification to the taxpayer outlining the amount of debt owed. This notification is not considered a tax bill. If the IRS does not collect the tax debt within 10 years, the statute of limitations will expire on the debt and it will be forgiven.
The IRS will penalize Michigan taxpayers for violating IRS tax regulations. Penalties may be assessed for failing to file a tax return, falsifying a refund request or providing inaccurate information on a tax return. Under certain conditions, the IRS may be willing to reduce or abate the penalties if Michigan taxpayers can provide a valid reason for the tax violation. Valid reasons for requesting penalty abatements may include: an environmental disasters, a personal crisis, a medical illness, or false tax information from a tax professional. The IRS may not lower or dismiss all penalties.