Negotiation with the IRS to Settle a Tax Debt
IRS negotiation of tax debts is a fundamental part of our tax practice. Typically, tax debt negotiation is required when the taxpayer owes taxes, penalties and interest to the IRS that they cannot afford to pay. A tax debt can be for one year or for multiple years. An unpaid tax debt may result from personal income taxes, business income taxes, payroll taxes or sales taxes.
Tax debt may be federal (owed to the IRS) or state (owed to a state Department of Revenue). And it may relate to an individual or a business. All of these taxes may be the subject of negotiation.
IRS negotiation and tax debt settlement begins with an evaluation of the resolution options that are available to the taxpayer. Resolution options include an offer in compromise, installment agreement or uncollectible status. Each option has its owns advantages and disadvantages. And each has its own special rules for qualification. Negotiating with the IRS often results in one of these resolution options.
However, it is critical to know that the IRS will not begin the negotiation process if the taxpayer is not complying with the tax rules. Tax compliance is the first step for IRS negotiation.
IRS Negotiation and the Problem of Unfiled Tax Returns
It is very common that individuals with a tax debt to the IRS have unfiled tax returns. The IRS will not negotiate with you or your representative unless the matter of unfiled tax returns has been resolved.
The IRS requires the filing of the previous six years of returns in order for negotiations to start. So if you have years of unfiled returns, call your CPA or Enrolled Agent and get those six years of returns prepared.
If you have a business and you are missing accounting and bookkeeping records, your CPA or bookkeeper will be able to get that done for you as well. Business tax returns cannot be prepared until the bookkeeping and accounting is ready to go.
Taxpayer have the option to file more than six years of returns, which is advantageous for years with net operating losses (NOLs) or capital losses. While refunds will not be allowed for older years, losses can be carried forward to offset future income.
IRS Tax Negotiation, Unpaid Taxes and IRS Debt Settlement
In addition to the requirement that tax returns be filed, the IRS will not negotiate with you or your representative, or settle a tax debt, if you are not current with your tax payments for the current year.
The IRS will check on the following before agreeing to any kind of tax settlement:
- Sufficient payroll tax are being withheld for employees
- Quarterly estimated tax payments are being made (important for contractors, the self-employed and business owners)
- Payroll tax are being deposited by employers
Unpaid quarterly taxes is often a problem for business owners and contractors. As a reminder, business owners and contractors are required to make quarterly tax payments to the IRS, in lieu of payroll tax withholding. Without this, there will be no discussions with the IRS about offers in compromise, installment agreements or any other IRS tax relief program.
As a reminder, quarterly tax payments are due to the IRS on April 15, June 15, September 15 and January 15 of the following year. They are a requirement for a business owner looking for an IRS debt settlement.
For employers, payroll tax returns are due both quarterly (Form 941) and annually (Form 940). This IRS will not negotiate with a business owner if these forms have not been submitted for the current year.
What is a Substitute for Return and How Does it Impact Tax Negotiation?
A “Substitute for Return” is a tax return prepared by the IRS when a taxpayer does not prepare his or her own tax return, despite many requests by the IRS to do so.
It is considered a filed tax return for purposes of the six year filing requirement.
A Substitute for Return usually overstates the tax because it is prepared with unfavorable tax attributes and without deductions. For example, a Substitute for Return will be filed as Single, rather than Married Filing Jointly, even if the taxpayer is married. This results in a higher tax.
A taxpayer may file an actual return to replace and correct a Substitute for Return prepared by the IRS. This is usually beneficial, as an actual return allows the taxpayer to take advantage of a better tax status or deductions. Nevertheless, the taxpayer is not required to do so.
Correcting a Substitute for Return prepared by the IRS is often an important part of the IRS tax debt negotiation process.
What to Do if I Cannot Afford to Pay My Tax?
If you cannot afford to pay your tax, file a tax return anyway. You can always pay the tax later.
Filing a tax return without payment will protect you from penalties on unfiled tax returns. (Although there may be penalties and interest for a late payment).
Once the return is filed, you may be eligible for a negotiated settlement of your tax debt. This includes an offer in compromise or installment payment plan, as well as other programs to resolve or settle your tax debt.
Tax Lien, Tax Levy and Wage Garnishment
An unpaid tax debt will normally trigger a tax lien. The lien is automatic for tax debts over $10,000.
A tax levy refers to IRS seizing your assets, or the assets of your business, to satisfy a tax debt. Assets subject to a tax levy including cash in the bank, social security benefits, accounts receivable of a business, and retirement plan assets.
A garnishment is a type of tax levy where the IRS seizes wages due to the taxpayer. A garnishment is sometimes called a levy on wages. If a garnishment order is issued, the IRS will instruct the employer to forward most of the taxpayer’s wages to the government to satisfy the tax debt.
Negotiation of a tax debt with the IRS includes the resolution of liens, levies and garnishments. Make sure to discuss this with the CPA or tax advisor who is negotiating your tax debt with the IRS. These can be used as negotiation points when setting a tax debt.
Taxes and Passports
If you owe significant tax debt, you may be in for a surprise. The State Department will revoke your passport, or not issue you a new passport, if you owe a significant tax debt to the IRS. Therefore, taxpayers with tax debts and international travel plans should contact their CPA as soon as possible to resolve their tax debt and protect their passport.
Check out our article on how to stay off the IRS Passport Revocation List.
10-Year Statute of Limitations Impacts Negotiating with the IRS
A federal tax debt has a 10 year statute of limitations. This means that the IRS has 10 years after the date of assessment to collect a tax debt from you. When the 10 year statute of limitations expires, the tax debt goes away, including all related interest and penalties. The date on which the statute of limitations expires is called the Collection Statute Expiration Date, or CSED.
Part of our job as CPAs and tax advisors is to consult with our clients on their status with respect to the statute of limitations. The number of years remaining on the statute of limitations can influence a decision as to which options to choose when negotiating with the IRS.
Furthermore, a taxpayer may inadvertently extend the statute of limitations, which gives the IRS additional time to collect the tax debt. We work with our clients to avoid this outcome.
IRS Tax Negotiators
There are relatively few qualified IRS negotiators in this country, considered that there are over 14,000,000 taxpayers (individuals and businesses) in the Collection Division inventory of the IRS. Only CPAs, attorneys and enrolled agents can represent taxpayers before the IRS. However, very few of them are qualified as IRS negotiators and few are familiar with this specialized area of tax law.
In most cases, it is best not to represent yourself when negotiating with the IRS or trying to obtain an IRS debt settlement. The laws are simply too complicated for an untrained person to do it themselves. And appearing before the IRS can be an emotional experience for the taxpayer who is involved in the case.
Therefore, DIY is not a good idea when you are having a complicated tax problem with the IRS, particularly where the tax dollars are high. As a rule of thumb, we recommend that a taxpayer hire an IRS negotiator (CPA, tax attorney or Enrolled Agent) when the amount of federal tax involved, including interest and penalties, is $10,000 or more.
Our accounting firm, Massey and Company CPA, has significant experience with tax problem resolution, taxpayer representation and IRS negotiation of tax debts. We have experienced teams on the ground in Atlanta and Chicago. We can also meet with you over video conference in the event that you are not local to those two cities.
We would be honored to be your IRS negotiator and resolve your tax problems for you.
If you or someone you know has an issue with the IRS, please contact us in Atlanta at (678) 235-5460 or in Chicago at (773) 828-0551.
Or you can reach us by email at Gary.Massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.
Gary Massey, CPA, our managing director, is a Certified Tax Representation Consultant.