IRS offers collection alternatives for your financially distressed clients
Statistics show that more taxpayers need help in this area than ever before.
May 28, 2013
In 2010, 23.9 million individual taxpayers filed a tax return with a balance due. More than 20 million taxpayers paid the tax with their return, after the first IRS notice, or after receiving an extension to pay from the IRS. The remaining 3.8 million taxpayers had to make other arrangements to pay their outstanding tax liabilities.
In 2011, the IRS began introducing Fresh Start initiatives that have relaxed rules for payment alternatives. The 2012 results were positive for taxpayers: There were 32% fewer federal tax liens filed and 20% more offers in compromise accepted than in 2011.
Statistics show that more taxpayers need help in this area than ever before. As of Sept. 30, 2012, a total of 11.5 million taxpayer accounts were subject to IRS delinquent collection activities. In 2006, before the recession, there were a little more than 7 million accounts subject to IRS delinquent collection activities. This 62% increase in six years far outweighs the 10% increase in the number of individual and business taxpayers.
The most commonly used alternatives are extensions of time to pay and streamlined installment agreements. That’s because most individual taxpayers just need a few weeks to get the funds to pay their tax bill, or they can pay monthly. If your client owes more than $50,000, you will need to establish a more complicated arrangement with the IRS, such as an installment agreement based on your client’s calculated ability to pay, a payment deferral, or an offer in compromise.
If your client simply needs some extra time to pay, a 120-day extension to pay in full is usually the best option. Contact the IRS Practitioner Priority Service (PPS) or use the online payment agreement application at irs.gov. If your client’s account is already being handled by the IRS Collection Division (that is, your client has received a final notice of intent to levy), the maximum allowed extension is 60 days. The IRS grants extensions to both individual and business taxpayers.
Streamlined installment agreements
In 2010, about 94% of all individual installment agreements were streamlined agreements. In 2012, the IRS relaxed the rules to allow even more individuals to qualify for streamlined installment agreements and to reduce the number of liens filed. Streamlined agreements are available to individuals who owe $50,000 or less and can pay the tax in full within 72 months. Before March 2012, streamlined agreements were limited to liabilities of $25,000 or less, payable within 60 months.
Streamlined agreements require less paperwork than other types of agreements. The IRS requires only employment and banking information to be submitted with the agreement request, if your client:
In a streamlined agreement, the IRS will not file a federal tax lien on amounts of $25,000 or less. For amounts between $25,001 and $50,000 the IRS requires that your client pay by direct debit to avoid a lien filing.
There are several ways to obtain a streamlined agreement for your client:
Nonstreamlined installment agreements
If your client owes more than $50,000 or cannot meet the streamlined installment agreement payment terms, you will need to make arrangements with the IRS based on your client’s ability to pay. This requires analyzing your client’s financial picture to determine how much he or she can pay the IRS from equity in assets and through a monthly installment agreement.
Equity in assets. Typically, the IRS will request that taxpayers first use equity in assets, such as funds in an IRA or value in stock owned. The IRS can also ask taxpayers to obtain loans on assets, such as a home equity line of credit, to reduce the balance owed. Often, taxpayers request an extension of time to obtain a loan or use assets to reduce the balance owed to less than $50,000. Then, they can secure a streamlined agreement for the remaining balance.
Monthly payments. If your client still owes more than $50,000 after having used available equity in assets, he or she must make monthly payments based on his or her income and expenses. You will need to file a Collection Information Statement (Form 433-A or 433-B) with the IRS and propose a monthly payment amount.
If your client can pay within 72 months, he or she can establish what is informally called a conditional installment agreement, which allows payments based on his or her actual monthly income and expenses. IRS Fresh Start initiatives have encouraged the use of these agreements, which allow taxpayers more flexible payment terms, to reduce the 18% default rate on IRS payment agreements in 2012.
If your client cannot pay within 72 months, or if the IRS determines that your client’s expenses are excessive, the IRS can set limits on his or her living expenses using collection financial standards, which limit household expenses such as housing, food, and vehicle operating and ownership costs.
For nonstreamlined agreements, the IRS will file a tax lien if more than $10,000 is owed. To request a nonstreamlined agreement, you must contact the IRS by phone, in writing, or in person.
Currently not collectible
If your client cannot pay the IRS, you can request currently not collectible (CNC) status, which strictly limits allowable expenses to necessary living expenses limited by IRS collection financial standards. CNC status is usually temporary; the IRS uses manual and automated procedures to determine whether your client’s financial situation has improved.
For CNC arrangements, the IRS will file a tax lien if more than $10,000 is owed. To request a CNC arrangement, you must contact the IRS by phone, in writing, or in person.
Offers in compromise
If your client has few assets, little monthly income, and little or no prospects for future income, you may want to consider requesting an offer in compromise (OIC). An OIC allows a taxpayer and the IRS to agree to settle the tax liability for less than the full amount owed.
A taxpayer qualifies only if he or she cannot pay the tax in full with available equity in assets or with monthly installment payments before the collection statute expires. If a taxpayer qualifies, the amount paid will be equal to the taxpayer’s net equity in assets, plus one or two years of future income, depending on the type of offer selected.
The OIC option has become much more attractive to financially distressed taxpayers since the IRS made Fresh Start changes in 2012. Prior to these changes, taxpayers paid offer amounts computed on four to five years of future income. Fresh Start also relaxed rules on calculations of equity in assets and expanded expenses allowed in determining future income, including student loans and state and local tax installment agreements.
Even with midyear changes, in 2012, the number of OIC applications submitted increased 8%, and the number of OICs accepted increased 20% compared with 2011. However, be wary; this program is not for the temporarily distressed. Viable businesses and taxpayers with short-term financial hardships are generally not good candidates for the OIC.
Help for your client
Your client may be one of many who need an alternative payment arrangement this tax season. First look to the most common alternatives for taxpayers with a short-term inability to pay: an extension or a streamlined installment agreement. If your client cannot meet the terms for one of these options, you will need to examine his or her financial situation and help him or her establish an agreement based on the ability to pay.
Jim Buttonow, CPA/CITP, is cofounder of New River Innovation.