Montana taxpayers now have a variety of IRS tax settlement options they can use to settle federal tax debt. Many available options will allow Montana taxpayers to pay a fraction of the total amount owed. The Internal Revenue Service (IRS) may accept an IRS tax settlement to help Montana taxpayers meet their tax obligations and help the IRS avoid an extended installment agreement or avoid declaring debt as currently not collectible.
The federal government has given the IRS the authority to collect federal tax debt and if necessary to use very aggressive tax collection actions (wage garnishment, repossession, bank levies, imprisonment) against the taxpayer. Montana residents who have become the target of these actions may want to consult with a tax professional to discuss their IRS tax settlement options.
Offer in Compromise
One of the most common types of IRS tax settlement options is Offer in Compromise or OIC. Offer in Compromise allows the Montana taxpayer to make an offer to the IRS. If the IRS accepts this offer it is considered a “compromise” and all the taxes outlined in the OIC agreement will be settled after the Montana taxpayer meets the requirements of the agreement. The IRS has sole discretion to reject or accept Offer in Compromise offers.
The IRS will accept approximate 25% of first time OIC offers but may be willing to accept more after negotiations or a formal appeal. Penalties and interest will continue to accrue while the IRS is considering the OIC, but if the OIC is accepted, collection efforts will cease.
Offer in Compromise can be expensive, time consuming and difficult to implement. The Offer in Compromise application process will require Montana taxpayers to send detailed financial information to the IRS which they can use to continue collections if the Offer in Compromise is denied. Offer in Compromise is one of several IRS tax settlement options available to Montana taxpayers and it may not always be the best.
Qualifying for Offer in Compromise
Montana residents will only qualify for Offer in Compromise if they meet one of the following criteria:
- Doubt as to Liability- The IRS must believe the amount of IRS tax debt assessed could be incorrect. This could be due to a miscalculation or if additional tax information is provided. This condition does not frequently occur.
- Doubt as to Collectibility- The IRS may grant an Offer in Compromise if they believe they will not be able to collect the IRS tax debt either now or in the future.
- Effective Tax Administration- Montana taxpayers who can not pay their IRS tax debt because doing so would cause a “hardship which is inequitable or unfair” may receive an Offer in Compromise. The handicapped and elderly most frequently qualify under this condition.
The following tasks must also be completed by Montana taxpayers:
- All IRS tax debt must be paid on or before the federal deadline for the next 5 years.
- All of the requirements outlined in the OIC must be completed.
- All federal tax returns must be completed and submitted to the IRS by the federal tax deadline.
Montana taxpayers who do not want to apply for an OIC or who may not qualify may be able to use an installment agreement to pay IRS debt. The installment agreement will require the full amount of tax debt to be paid, but payments can be extended over a set period of time. The IRS generally accepts installment agreements for taxpayers owing $25,000 or less as long as the debt is repaid within 60 months.
Montana taxpayers who owe more than $25,000 should contact a tax professional for help negotiating an installment agreement. The installment agreement will not stop the penalties or interest from accumulating, but it will stop the aggressive collection efforts. It is always less expensive to make one lump sum payment for tax debt. The IRS has the authority to deny or cancel an installment agreement if any of the following occurs:
- Fails to pay their monthly installment payment.
- Fails to submit their federal tax returns each year.
- Fails to pay the full amount of the tax payment due each month. First time violators may be granted a 30-60 day grace period.
- The financial status of the Montana taxpayer improves drastically
- The Montana taxpayer provides incorrect financial information to the Internal Revenue Service on the installment agreement application.
- Montana taxpayers who are self-employed fail to file federal tax returns each quarter or make their quarterly tax payments.
- Montana taxpayers fail to pay all of their federal tax debt for the five years before the IRS debt which can not be paid.
- Montana taxpayers have had another installment agreement within the last five years.
Partial Payment Installment Agreement
Montana taxpayers also may be able to settle their IRS tax debt with a partial payment installment agreement or PPIA. The PPIA can be much simpler and less expensive to implement than the OIC, but it may allow Montana taxpayers to pay only part of the tax debt owed. Unlike the installment agreement, the PPIA will allow Montana taxpayers to make partial monthly installment payments. All taxes which are not paid may be forgiven.
Penalties and interest will continue to accrue, but the IRS will cease all debt collection actions against the Montana taxpayer. The Internal Revenue Service will review the partial payment installment agreement every 2 years to determine if the Montana taxpayer’s financial condition has improved, if it has, the IRS may decide to modify or terminate the plan.
Currently Not Collectible
Under certain conditions the IRS may determine the Montana taxpayer’s debt is not collectible and they will change the tax status to “currently not collectible”. Under this status, the IRS will cease all collection actions against the Montana taxpayer. Interest and penalties will continue to collect on the outstanding tax debt.
The IRS will send a letter each year detailing the amount of outstanding tax debt the Montana taxpayer owes, but this letter is not considered a tax bill. The IRS has ten years to collect all tax debt. If the IRS fails to collect the tax debt within this time period the statute of limitations on the debt will expire and the debt will be forgiven.
Penalties may be assessed against Montana taxpayers for a variety of tax reporting infractions including: failure to file a federal tax return, misrepresenting financial information either accidently or intentionally, or requesting a false refund. The IRS may be willing to abate or lower the penalties if the Montana taxpayer has a valid reason for the mistake such as: personal duress, incorrect professional tax advice, poor physical or mental health or a natural disaster occurred. The IRS may not be willing to abate all penalties.