How to Negotiate with the IRS: Resolving a Tax Debt

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How to Negotiate with the IRS: Resolving a Tax Debt

IRS Negotiation

Understanding Tax Debt Relief

Tax debt relief refers to the various options available to individuals and businesses struggling to pay their tax obligations. The IRS offers several programs and services to help taxpayers manage their tax debt, including installment agreements, offers in compromise and tax penalty abatement. Understanding these options is important for taxpayers who want to avoid further penalties and interest on their tax debt.

Tax debt relief can provide significant benefits, including reduced monthly payments, waived penalties and even complete forgiveness of tax debt in some cases. However, the process of obtaining tax debt relief can be complex and time-consuming, requiring careful documentation and negotiation with the IRS.

Negotiation with the IRS to Settle a Tax Debt

IRS negotiation

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.

When submitting an Offer in Compromise, an initial payment may be required based on the chosen payment plan. It is also critical to be current on tax return filings as part of the evaluation process for settling tax debts.

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.

Taxpayers can file an Installment Agreement Request (Form 9465) to settle their tax obligations through monthly payments.

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.

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 Due to Financial Hardship?

Cannot afford to pay 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. Paying a lump sum can be a viable option when proposing a reduced payment for tax liabilities, particularly for those who demonstrate an inability to pay their full 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.

Understanding your financial situation in relation to your tax bill is crucial when negotiating with the IRS for options like Offer in Compromise or payment plans.

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

Passport and IRS

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.

Qualifying for Tax Debt Relief

To qualify for tax debt relief, taxpayers must meet certain eligibility criteria. These criteria vary depending on the specific program or service, but generally include:

  • Financial hardship: Taxpayers must demonstrate that they are experiencing financial hardship and are unable to pay their tax debt in full.
  • Tax liability: Taxpayers must have a legitimate tax liability that they are unable to pay.
  • Compliance: Taxpayers must be in compliance with all tax laws and regulations, including filing all required tax returns and making timely payments.

 

Taxpayers who meet these criteria may be eligible for tax debt relief programs, including installment agreements, offers in compromise, and tax penalty abatement.

Tax Penalty Abatement and Relief

Tax penalty abatement and relief refer to the process of reducing or eliminating penalties associated with tax debt. The IRS may waive penalties for taxpayers who can demonstrate reasonable cause for their failure to pay taxes on time.

Reasonable cause may include:

  • Serious illness or disability
  • Death of a family member
  • Natural disasters or other catastrophic events
  • Unforeseen business circumstances

 

Taxpayers who believe they have reasonable cause for their failure to pay taxes on time may submit a request for penalty abatement to the IRS. This request must be made in writing and must include documentation supporting the taxpayer’s claim.

Bankruptcy and Tax Debt

Bankruptcy can provide relief for taxpayers struggling with tax debt, but it is not always the best option. In some cases, bankruptcy may eliminate tax debt, but it can also have significant consequences, including damage to credit scores and potential tax implications.

Taxpayers considering bankruptcy should consult with a tax professional to determine the best course of action. In some cases, alternative options, such as installment agreements or offers in compromise, may be more beneficial.

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.

For federal income taxes, the statute of limitations generally spans ten years unless fraud is involved. It is advisable to consult with a CPA or other a tax professional for guidance, as complexities such as bankruptcy or disputes with the IRS can affect this time frame.

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.

Working with a Tax Professional for IRS Tax Debt

Working with a tax professional can be beneficial for taxpayers struggling with IRS tax debt. Tax professionals can help taxpayers navigate the complex process of tax debt relief, including:

  • Determining eligibility for tax debt relief programs
  • Preparing and submitting applications for tax debt relief
  • Negotiating with the IRS on behalf of the taxpayer
  • Providing guidance on tax laws and regulations

 

Tax professionals can also help taxpayers avoid common mistakes that can lead to further penalties and interest on their tax debt. By working with a tax professional, taxpayers can ensure that they receive the best possible outcome for their tax debt relief case.

IRS Tax Negotiators and Tax Professional Assistance

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.

A CPA or other tax qualified professional can assist individuals with tax debt by performing initial investigations and negotiating repayment plans with the IRS, making the process easier for those with substantial debt.

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.

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.

Massey and Company CPA

Based in Atlanta and Chicago, Massey and Company CPA specializes in tax and accounting matters of small businesses, entrepreneurs, and their families.
 
We do everything related to tax return preparation and tax planning, as well as accounting and bookkeeping for small businesses using QuickBooks Online.
 
In addition, we represent taxpayers before the IRS, keeping taxpayers out of tax trouble. We negotiate with the IRS and the state, so you do not have to.
 
We know the tax issues. We know our way around the IRS. We know QuickBooks. And we know how to help you save taxes and keep more of your hard-earned profits.

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