You may owe the IRS or State of California and are unable to pay the entire amount what can you do?
- Installment agreement- If you can pay your federal tax debt in 72 months (6 years) or less and you owe less than $25,000 you would likely be eligible for a streamlined agreement. This type of agreement is relatively painless and does not require a full financial analysis of your ability to pay. For state tax debts, the State of California prefers a payment period of 36 months or less for a stream line agreement. Any agreement require that you meet your filing obligations. If you can’t pay in the timelines previously suggested or your debt exceeds the streamline guidelines you must fill out a collection information statement form. The IRS or State will evaluate your resources and ability to pay. This may include wages, assets, property, insurance accounts, retirement accounts and lines of credit. The advantage of the installment agreement is that you remain in tax compliance and resolve your tax debt at a schedule you can handle.
- Currently Non-Collectible Status (CNC)- If you cannot pay anything towards your tax debt then you may request to be put in CNC status. The State of California calls it hardship status. You will have to fill out a financial collection information statement form. If you do not have the ability to pay the IRS (or State) will halt collection action. This does not absolve you of your tax debt. The outstanding debt will remain and interest will accrue. It is also temporary. The State of California usually will only grant this status for 1-2 years before making the taxpayer reapply. The IRS may allow it for an extended period beyond that but if your income changes you will no longer be eligible to be in CNC status. You are also required to timely file your returns. If you fail to do so you will face collections actions.
- Offer in Compromise- TV adds tend to frequently promote this program. A taxpayer who cannot pay their debt can apply for a reduced settlement of their account. Ninety percent of offers are denied by the IRS. You want to make sure that you have a professional handle your offer to avoid or appeal if necessary. The IRS looks at the ability of a taxpayer to pay. Once again, wages, assets, equity, investments, retirement accounts and financial history are evaluated. There are 3 types of offers 1) Doubt as to Collectiblity 2) Effective Tax Administration (ETA) and 3) Doubt as to Liability. Doubt to Collectibility is based on the fact the taxpayer does not have assets or finances to pay the tax debt. Effective Tax Administration allows for an offer even though there is a possibility the taxpayer has the means to pay their debt. I often use ETA offers when the client does not have the cash to make payments but may have equity to pay the debt. If you have equity but have to close your business or sell your primary residence to pay the tax debt, I would recommend an ETA offer. If you think the IRS made a mistake regarding your assessment and you want them to reconsider or re-evaluate the underlying liability, this offer would apply. If you filed a tax court petition and lost you cannot use this form of offer.