IRS Collection Alternatives – Five Potential Options to Pay an IRS Debt

If you owe the IRS and cannot pay in full, there are five collection alternatives that you can obtain from the IRS that you can use.

Extensions of time to pay and easy to obtain installment agreements are the most common alternatives selected by those who owe. In most instances, individual taxpayers just need a short time to pay their tax bill or they just need payment terms. If you owe more than $50,000, you will need to establish a more complicated arrangement with the IRS, such as an installment agreement based on your calculated ability to pay, a payment deferral, or an offer in compromise.

Here are the five alternatives:

#1:  Payment extension

For taxpayers that need some time to gather funds to pay, a one-time 120-day extension to pay in full is a good option. One caution note:  if you are in IRS collection (that is, you have received a Final Notice of Intent to Levy), the IRS will usually only give you up to a 60-day extension.  It is possible to get another 60 days, but you will need to ask again.  Obtaining extensions to pay is fairly easy, you call the IRS or use the online payment agreement application on IRS.gov.

#2:  Streamlined installment agreements

Easy to obtain, streamline installment agreements are the most popular collection alternative for taxpayers.  Each year, more than 9 out of 10 agreements to pay for all individuals are streamlined agreements. In 2012, under the IRS Fresh Start Initiative, the IRS relaxed the rules to allow more individuals to qualify for streamlined installment agreements and to reduce the number of liens filed. Streamlined agreements were expanded to those 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 are much easier to obtain than the more complicated ability to pay agreements described below.  They require less paperwork and qualification rules than the other types of agreements. The IRS requires only employment and banking information to be submitted with the agreement request.   In October, 2016, the IRS relaxed the paperwork even more to quickly facilitate taxpayers entering agreements when they owe between $25,000 and $50,000.

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 the taxpayer pay by direct debit to avoid a lien filing.

You can also get this agreement by phone, with a Form 9465 (Installment agreement request), or using the IRS online payment agreement tool.

#3: Non-streamlined installment agreements

When you owe more than $50,000, the collection alternative rules get complicated.

Recent rules adopted by the IRS in October, 2016, allow taxpayers to get into an 84-month payment plan (assuming that their statute of limitations to collect is more than 84 months) if they owe between $50,000 and $100,000.

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However, when a taxpayer owes more than $50,000 or cannot meet the streamlined installment agreement payment terms or the new 84-month terms, they will need to make arrangements with the IRS based on their ability to pay. This requires that the taxpayer analyze their finances to determine how much can be paid to the IRS from equity in assets and through a monthly installment agreement. Let me briefly explain these components to you:

First- the equity in assets.  Especially in higher debt cases (i.e. those approaching $100,000), the IRS will request that taxpayers first use equity in assets, such as savings, funds in an IRA, or available borrowing from a 401K. The IRS can also ask taxpayers to obtain loans on assets, such as a home equity line of credit, to reduce the balance owed. A common technique for taxpayers who can reduce the amount owed with assets and to get into favorable payment terms is to 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.

The second component is what can be paid monthly. If the taxpayer cannot meet the streamlined terms or the new 84-month payment terms for amounts between $50,000 and $100,000, they must make monthly payments based on what the IRS deems to be their “monthly disposable income.” (i.e. their regular monthly income less allowable, necessary living expenses or expenses to produce income). In these cases, the IRS will require that the taxpayer provide them with a Collection Information Statement (Form 433-A, B, or F)  and propose a monthly payment amount.

The IRS can be flexible with ability to pay agreements.  If the taxpayer can pay the amount owed 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.  To obtain a non-streamlined, ability to pay agreement, you must contact the IRS by mail or by phone and file the appropriate paperwork.

What drives many taxpayer’s collection alternative decision is whether they want a tax lien filed on them.  The rule for tax liens and installment agreements:  for the non-streamlined agreements, the IRS will file a tax lien if more than $10,000 is owed.  If done timely, streamlined agreements avoid a tax lien filing.

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#4:  Currently not collectible

What happens if your ability to pay is $0 a month?  If the taxpayer cannot pay the IRS, he or she can request currently not collectible (CNC) status.  CNS strictly limits the taxpayer’s allowable expenses to necessary living expenses limited by IRS collection financial standards and expenses to produce income (think purchasing work tools). CNC status is usually temporary.  The IRS looks for future increases in income on filed tax returns and information statements (W-2s and 1099s) to determine whether you should remain in CNC.

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For CNC arrangements, the IRS will file a tax lien if more than $10,000 is owed.  Like non-streamlined agreements, CNC requires contact with the IRS and the filing of collection information to prove this status.

#5:  Offers in compromise

If you have 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 you to settle the tax liability for less than the full amount owed.  Not all taxpayers qualify for an OIC – in fact, very few get an OIC (about 25,000 out of 19 million people who owe the IRS received an OIC last year).

A taxpayer qualifies only if he or she cannot pay the tax in full with equity in assets or with monthly payments of disposable income 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.

One point of optimism on OICs.  Since 2012, the OIC option has become much more attractive to financially distressed taxpayers.  This was part of the IRS’ “Fresh Start Initiative” that softened collection rules to financially distressed taxpayers.   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 allowing some student loan payments and state and local tax installment agreements.

A Possible 6th Option?

These are the five IRS collection alternatives.  There is another alternative for those who are experience financial hardship -not just in taxes, but with other areas of their life – bankruptcy.

Bankruptcy is not an IRS solution, but it can be used to resolve older taxes owed or to get favorable payment terms with the IRS.  You do not get this alternative with the IRS, but rather through a bankruptcy filing. – Source

Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at jim@buttonowcpa.com or through his website www.buttonowcpa.com