The Internal Revenue Service (IRS) has been tasked with collecting federal taxes. The Federal government has also given the IRS not only the ability to use aggressive collection actions to ensure all federal tax debt is paid but also the authority to create a variety of IRS tax settlement options to facilitate tax payment. Taxpayers frequently can use one of these IRS tax settlement options to pay their debt for a fraction of the full amount owed. The IRS hopes by providing a method to settle back taxes taxpayers will be more likely to make all of their future tax payments.
All Missouri taxpayers who have outstanding IRS tax debt can contact a tax professional (enrolled tax agent, tax attorney or a certified public accountant) who can review all of the IRS tax settlement options available.
Offer in Compromise
Offer in Compromise is one of the main tax settlement options people might consider when they want to settle their tax debt and under certain conditions it may be the best. Offer in Compromise will allow the Missouri taxpayer to propose a settlement payment amount and if the IRS accepts the offer the amount outlined in the OIC will settle their outstanding tax debt.
Penalties and interest will continue to accrue while the OIC is under consideration by the Internal Revenue Service. If the IRS accepts the OIC they will cease all collection actions against the Missouri taxpayer. The OIC process can be time consuming, expensive and difficult. The Internal Revenue Service will need detailed financial information to process the OIC and if it is denied they can use the information they have gathered to restart debt collection.
The IRS will not accept all Offer in Compromise offers. Currently about 20% of first time offers are accepted prior to negotiations or appeals. Offer in Compromise is only one of several IRS tax settlement options available to Missouri taxpayers and it may not be the best option.
Qualifying for Offer in Compromise
The IRS will not accept all OIC offers. To qualify for an OIC, the Missouri taxpayer must meet one of the following conditions:
- Doubt as to Liability- If the IRS believes the amount assessed against the taxpayer could be incorrect they may accept an OIC. Inaccurate tax assessments could be the result of a miscalculation or failure to consider all tax information. The IRS does not generally use this condition to accept an OIC.
- Doubt as to Collectibility- Under this condition the amount of tax debt is not in question only the ability of the IRS to collect the tax debt either now or in the future. In some cases the IRS may also accept an OIC under this condition if the cost to collect the IRS debt is too high.
- Effective Tax Administration- If payment of the IRS tax debt may cause a hardship which is “inequitable or unfair” for the Missouri taxpayer the IRS may accept an OIC. This condition is most frequently used for the handicapped and elderly.
The following OIC requirements must also be met:
- The Missouri taxpayer must pay all IRS tax debt before the federal deadline for the next 5 years.
- The Missouri taxpayer must make the required Offer in Compromise payments.
- The Missouri taxpayer must send all requested OIC information and all of their federal tax forms to the IRS by the federal tax deadline.
Taxpayers who do not qualify for an OIC can also use another popular tax settlement option called the installment agreement. Installment agreements or IA can be used by the Missouri taxpayer to pay all of their outstanding tax payments in monthly installments. Using the installment agreement, the Missouri taxpayer will make tax payments for a specific period of time. The time may vary based on the total amount of IRS tax owed. Missouri taxpayers who owe $25,000 or less can generally qualify for an installment agreement, but taxpayers who owe $25,000 or more will want to contact a tax professional for help.
The installment agreement will stop all IRS collection efforts against the Missouri taxpayer, but unfortunately, penalties and interest will continue to accumulate. It is always less expensive to pay all IRS tax debt with a one time payment to avoid penalties and interest payments. The IRS has the authority to terminate an installment agreement if Missouri taxpayers do not follow all the IA requirements. Violations of the requirements may include:
- Failing to pay the full amount of the installment agreement. The IRS may grant first time violators a 30-60 day grace period.
- Failing to file a federal tax return each year.
- The Missouri taxpayer’s financial situation dramatically improves.
- Falsifying financial information to obtain the installment agreement.
- Failure of the self-employed Missouri taxpayer to submit their federal tax returns each quarter or pay their quarterly federal tax payments.
- Failing to make all federal tax payments for the 5 years before the federal tax debt which can not be paid.
- Having another installment agreement within the last 5 years.
Partial Payment Installment Agreement
Missouri taxpayers who do want to use an Offer in Compromise or who can not make the full tax payments with an installment agreement may be able to settle their tax debt with a partial payment installment agreement or PPIA. The PPIA may allow the taxpayer to pay part of their IRS tax debt within a specified time period using monthly installment payments. Unlike the installment agreement, partial not full payments are made and the tax debt not paid will be considered settled or forgiven by the Internal Revenue Service.
The PPIA will not stop penalties and interest from accruing but it will stop all IRS collection efforts. The IRS will review the partial payment installment agreement every two years to make sure the Missouri taxpayer’s financial situation has not improved so significantly that the PPIA could be updated or cancelled.
Currently Not Collectible
If a Missouri taxpayer absolutely can not pay tax debt the IRS may change the status of the debt to currently not collectible. The accumulation of penalties and interest will continue until the tax debt is paid or the debt is forgiven. The IRS will send written notification to the taxpayer outlining the amount of tax debt still owed. This notice is not a tax bill. If the IRS does not collect the IRS debt within 10 years the statute of limitations will expire and the tax debt will be forgiven.
Missouri taxpayers may be assessed IRS penalties if they fail to file a tax return, report inaccurate tax information on their tax return or request a false refund. The IRS may be willing to abate the penalties if the Missouri taxpayer can prove there was a valid reason the error occurred. Penalty abatement may be allowed if the taxpayer can prove: failing mental or physical health, poor tax professional advice or personal duress. The IRS may not be willing to abate all penalties. Missouri taxpayers who have questions about penalty abatement should contact a tax professional.