Taxpayers who have excessive federal tax debt may be able to use an IRS tax settlement option to settle their debt. The IRS has created a variety of programs to help taxpayers pay back tax debt and some of these options may allow the Pennsylvania taxpayer to settle tax debt for a fraction of the full amount owed.
The IRS has been given the authority to collect federal taxes and to use a variety of tactics to ensure the tax is paid. Pennsylvania taxpayers who have failed to pay their federal taxes may become the target of IRS debt collectors. Taxpayers who have had their wages garnished, property repossessed or bank accounts levied need to contact a tax professional for help. Tax professionals such as tax attorneys, enrolled agents or certified public accountants can provide information on all of the IRS tax settlement options available to Pennsylvania taxpayers.
Offer in Compromise
Offer in Compromise or OIC is one of the most popular IRS tax settlement options. Taxpayers who choose Offer in Compromise can make a settlement offer to the IRS. If the IRS chooses to accept their offer it is considered a “compromise payment” and all tax debt outlined in the OIC will be considered settled.
The IRS will not accept all OIC offers. Currently up to 80% of first time offers are denied. If the Pennsylvania taxpayer’s offer is denied, the IRS may be willing to negotiate or review the OIC denial through a formal appeal. The IRS will only accept the Offer in Compromise if the taxpayer meets certain requirements and the IRS does not think the tax payments can be made in one lump sum payment or with an installment agreement. Offer in Compromise if accepted, will stop all penalties and interest from accruing and will stop IRS debt collections.
Offer in Compromise can be difficult to implement and costly. The IRS will need detailed information from the Pennsylvania taxpayer to complete the OIC and if the OIC is denied, they can use this information to continue debt collection. OIC may allow the taxpayer to settle IRS tax debt at a fraction of the full cost, but there are other IRS tax settlement options available and Offer in Compromise may not always be the best option.
Qualifying for Offer in Compromise
The IRS will only accept an Offer in Compromise if the Pennsylvania taxpayer meets one of the following conditions:
- Doubt as to Liability- An Offer in Compromise may be accepted by the IRS if they believe there is some doubt as to the amount of federal tax debt owed. Errors in calculating tax debt are infrequent, but they could occur if an IRS administrator made a miscalculation, the taxpayer produces financial information which has not been considered or tax laws were misapplied.
- Doubt as to Collectibility- Under this condition there is not a question of the accuracy of the debt calculation, only doubt that the IRS will be able to collect the tax debt before the statutory collection period ends.
- Effective Tax Administration- If the IRS determines payment of the IRS tax debt may cause some Pennsylvania taxpayers a hardship which is “inequitable or unfair” they may accept an Offer in Compromise. This condition is most frequently used for the handicapped and elderly.
Pennsylvania taxpayers must also meet the following OIC requirements:
- All tax debt must be paid before the federal deadline for the next 5 years.
- All of the Offer in Compromise requirements must be met and all payments made.
- All OIC information and federal tax forms must be sent to the Internal Revenue Service.
The most popular method used by taxpayers to repay tax debt is through an installment agreement. Installment agreements or IA can be less expensive, less time consuming and easier to implement than an Offer in Compromise. The installment agreement will allow the Pennsylvania taxpayer to repay all IRS tax debt in monthly installment payments. The amount of time allowed by the IRS to repay the debt will vary based on the amount of tax debt owed.
Pennsylvania taxpayers who owe $25,000 or less can generally qualify for an installment agreement. Taxpayers who owe more than $25,000 should get help negotiating the installment agreement from a tax professional.
Penalties and interest will continue to collect during the installment period, but the Internal Revenue Service will cease all collection actions. It will always cost less to pay all tax debt in one lump sum rather than using an installment agreement. The installment agreement may be terminated for a variety of reasons including:
- Failing to pay the full agreed upon installment payment amount. The IRS may grant first time violators a 30-60 day grace period.
- Failing to file a federal tax return each year.
- If the Pennsylvania taxpayer’s financial position dramatically improves.
- Falsifying the information on the installment agreement application.
- If self-employed Pennsylvania taxpayers fail to file federal tax returns each quarter or pay estimated federal tax payments each quarter.
- Failing to pay all IRS tax payments for the 5 years before the tax debt which can not be paid.
- If the Pennsylvania taxpayer has had another installment agreement within the last 5 years.
Partial Payment Installment Agreement
Some Pennsylvania taxpayers will not qualify for an Offer in Compromise and may not be able to pay all of their tax debt with an installment agreement. For these taxpayers, there may be another option called the partial payment installment agreement or PPIA. PPIA differs from the installment agreement allowing Pennsylvania taxpayers to make partial monthly installment payments. All tax debt which is not part of the partial payment installment agreement will be forgiven.
Like the installment agreement, penalties and interest will continue to accumulate during the PPIA payment period. The IRS will however, cease all collection actions against the taxpayer. The terms of the PPIA will be reviewed every 2 years to determine if the Pennsylvania taxpayer’s financial position has changed. The PPIA payments can increase or the IRS can completely cancel the PPIA.
Currently Not Collectible
The IRS may determine some taxpayers are unable to pay their federal tax debt even with an IRS tax settlement. If this determination is made, the Pennsylvania taxpayer’s tax status can be changed to currently not collectible. Penalties and interest will continue to accrue on the IRS tax debt, but the IRS will stop all collection actions against the taxpayer.
Annual notice will be sent to the taxpayer documenting all tax debt which is outstanding. This notice is not considered a tax bill. The statute of limitations will expire on all tax debt if the IRS fails to collect the debt within 10 years.
Penalties which have been charged against a Pennsylvania taxpayer for any tax infraction may be lowered or abated by the IRS if the Pennsylvania taxpayer can provide a valid reason. Valid reasons could include: personal duress, a natural disaster, poor tax advice or poor mental or physical health. There are some penalties the IRS may not be willing to lower or abate.