If you find yourself owing the Internal Revenue Service more than $50,000, it becomes crucial to proactively safeguard your personal interests before the IRS initiates enforced collection measures. Facing forced IRS collection can be daunting, including actions such as seizing bank accounts or paychecks, confiscating personal property, blocking passport renewal, and more. In this article, we will explore several proactive steps you can take to address your tax situation directly and prevent the potentially stressful and detrimental consequences mentioned above.
Securing an installment agreement for tax debts that exceed the $50,000 threshold involves engaging with a tax collector, and this process offers different avenues for interaction. You may find yourself meeting face-to-face with a Revenue Officer (RO), or you could opt for a more remote approach by contacting the Automated Collection System (ACS) or the Service Center via phone or mail. It’s important to understand that the IRS is the entity that determines who will handle your case, and you do not have the authority to choose your representative.
Once the process is underway, the tax collector will initiate the collection of pertinent information to complete an IRS Collection Information Statement. In cases involving the Automated Collection System, the designated form is the 433-F, while when dealing with a Revenue Officer, the 433-A comes into play. These statements are essential tools for evaluating your financial situation and determining the appropriate monthly payment amount you should contribute to address your tax debt.
In many instances, the initial monthly payment proposal suggested by the tax collector may surpass what you believe is feasible for your budget. This discrepancy often necessitates the need for an appeal. Fortunately, the appeals process is an option available to you, and it provides a means to contest the proposed payment amount and potentially negotiate a more manageable arrangement.
Should you encounter difficulties during your interaction with ACS representatives, such as encountering someone who appears arbitrary or unreasonable in their assessment, it is advisable to terminate the call temporarily and try again after a short wait. However, it’s essential to note that, unlike ACS, you do not have the liberty to choose or change Revenue Officers when working directly with them in the field. Nevertheless, you always retain the right to initiate an appeal should you believe it is warranted to ensure a fair and reasonable resolution of your tax debt situation.
Negotiating an Installment Agreement
Here’s a strategic approach for negotiating an installment plan with the IRS:
- Determining Your Offer Amount: Start by calculating the minimum amount you can offer to pay, as specified at the bottom of Page four of the IRS Form 433-A. This amount should be your income minus necessary living expenses, reflecting the cash you have available after covering essential costs. It’s important to recognize that the IRS’s living standards may not fully account for the current high cost of living, driven by inflation. Be prepared for potentially contentious negotiations, as the IRS may initially push for higher payments.
- Stay Realistic: Avoid the temptation to promise to pay more than you can realistically afford just to secure approval for your payment arrangement. Making unattainable commitments can lead to difficulties down the road, as modifying an approved payment plan can be a cumbersome process.
- Consider Your Financial Situation: If your calculations result in a bottom line of $0 or even a negative number, it might be worth exploring the option of requesting uncollectible status. In such cases, you may be eligible for an Offer in Compromise, which could provide a path to settling your tax debt for less than the full amount owed.
- Bankruptcy as a Last Resort: Depending on your specific circumstances and the state you reside in, particularly if you are in California or Nevada, you might want to consider the possibility of using bankruptcy laws to discharge your tax debts. These states are known for having more favorable bankruptcy laws for debtors, potentially offering a way to alleviate your tax burden through bankruptcy proceedings.
It’s crucial to approach negotiations with the IRS methodically, considering your financial capabilities and exploring various options before making any commitments. Additionally, seeking professional advice from a tax expert or attorney who specializes in tax matters can provide valuable insights and guidance throughout the negotiation process. Remember that each case is unique, and the best approach may vary depending on your individual circumstances and the specific tax debt you’re dealing with.
Installment Agreement Fees
The IRS does impose fees for setting up an installment agreement, and the amount of these fees can vary depending on how you apply and your specific financial situation. Here’s a breakdown of the IRS installment agreement fees:
- Online Application: If you apply for an IRS payment plan online through IRS.gov, the initial setup fee is $107. However, you have the option to reduce this fee to $31 if you agree to set up automatic direct debits from your bank account to make your payments.
- Phone or In-Person Application: If you choose to apply for an installment agreement by phone or in person, the initial setup fee increases to $225. This is considerably higher than the online application fee.
- Reinstatement Fee: If you miss a payment and your installment agreement is revoked, there is a reinstatement fee of $45 to reinstate the payment plan.
- Lower Fees for Low-Income Taxpayers: Taxpayers who fall below the IRS-defined poverty level may be eligible for reduced fees. In some cases, the payment plan fee can be as low as $43. However, it’s worth noting that individuals in this financial situation may also be considered uncollectible by the IRS.
It’s important to be aware of these fees when considering an IRS installment agreement, and if possible, opting for the online application with automatic payments can save you money in setup fees. Additionally, individuals facing financial hardship may explore options for fee reductions or consider whether they qualify for uncollectible status or other IRS programs aimed at assisting those in difficult financial circumstances.
One important thing to note is that many state tax agencies also charge fees to establish payment arrangements on state tax debts. For example, the California Franchise Tax Board charges a $34 Installment Agreement fee.
When the IRS denies or revokes your Passport
Denial or revocation of a passport by the IRS is a possibility, but it’s important to understand the circumstances and exceptions surrounding this issue:
- Seriously Delinquent Tax Debt Notification: The IRS may notify the U.S. State Department if an individual has a “seriously delinquent tax debt.” This generally refers to individuals who owe more than $53,000 in taxes, penalties, and interest, and a Notice of Federal Tax Lien has been filed. It can also include individuals against whom a levy has been issued. The $53,000 threshold is adjusted annually for inflation.
- State Department Authority: The U.S. State Department is responsible for passport matters. Upon receiving notification from the IRS, the State Department can take actions such as refusing to issue or renew passports and even revoking existing ones. These measures can restrict your ability to travel outside the United States.
- Exceptions: There are exceptions to when the IRS will not notify the State Department. If you are making timely payments on an installment agreement, have an accepted Offer in Compromise (OIC), have filed for a Collection Due Process hearing, or have a pending request for “innocent spouse” relief, the IRS will not notify the State Department about your tax debt.
- Timing Matters: If you are beyond the 90-day window to resolve your tax debt, you will still need to negotiate a resolution to obtain your passport. However, you cannot simply present your resolution, such as written confirmation of an installment agreement, to the State Department. The IRS must officially notify the State Department of the resolution. This may require follow-up and persistence on your part, especially in urgent situations like personal emergencies or humanitarian grounds.
Why did the IRS reject my Installment Agreement request?
Before the IRS approves your payment arrangement, it needs to have confidence in the accuracy of the information you provide on your 433-A form and that it’s receiving the maximum monthly payment you can afford. However, there are several reasons why the IRS may deny your request for an installment agreement:
- Incomplete or Untruthful Information: If the details you provide on the Collection Information Statement (Form 433-A) are sketchy, incomplete, or appear to be untruthful, the IRS may be concerned that you are concealing assets or income intentionally. Taxpayers might be tempted to hide assets out of fear, but failing to disclose income from sources like W2s or 1099s or assets that can be verified through public records can raise red flags. In cases involving debts exceeding $50,000, the IRS might request three to six months of bank statements and seek explanations for certain deposits.
- Living Expenses Discrepancy: The IRS often applies strict living standards, which some individuals may find miserly compared to their actual expenses. If your reported living expenses include items such as significant credit card payments, charitable contributions, or educational expenses for your children, the IRS may be reluctant to accept these as necessary expenses. While compromise might seem reasonable to you, the IRS might be less inclined to do so.
- Prior Default on an Installment Agreement: If you’ve previously defaulted on an installment agreement with the IRS, it doesn’t automatically disqualify you from obtaining a new one. However, the IRS may approach your request with skepticism due to the historically high default rate (over 70%) on installment agreements. It’s essential to demonstrate your commitment and ability to adhere to the terms of the new arrangement.
What do I do if the IRS agent rejects my Installment Agreement request?
When facing a rejection of your proposed installment agreement by a Revenue Officer or an ACS phone representative from the IRS, there are steps you can take to address the situation and potentially seek resolution:
- Request to Speak to a Group Manager: If your proposed installment agreement is rejected, consider asking to speak with a Group Manager. The Group Manager has the authority to review and possibly take over your case or request the Collector to reconsider their decision. This can be a valuable step to explore alternative solutions.
- Appeal Options: If you remain dissatisfied with the outcome or resolution provided by the IRS Collector or Group Manager, you have the right to appeal the decision. With the IRS, you can pursue two primary avenues for appeal:
- Collection Due Process Hearing (CDP): You can file Form 12153, Request for a Collection Due Process or Equivalent Hearing, to request a CDP hearing. This allows an impartial review of your case.
- Collection Appeal Request (CAP): You can also file Form 9423, Collection Appeal Request, to seek a review by the IRS’s Collection Appeals Program. This can be a helpful option if you believe the rejection was made in error or is unjust.
It’s important to note that the appeal process provides a mechanism for taxpayers to have their case independently reviewed, potentially resulting in a more favorable outcome.
It’s worth highlighting that the process and options available with state tax agencies may vary significantly from those of the IRS. When dealing with state tax matters, it’s essential to familiarize yourself with the specific procedures and appeal mechanisms applicable to your state’s tax agency.
Why did the IRS revoke my established Installment Agreement?
There are several situations in which the IRS may consider revoking an existing installment agreement, and it’s important to be aware of these circumstances:
- Failure to File Future Returns or Pay on Time: The IRS typically monitors your compliance with future tax obligations, such as filing returns and making timely payments. If you fail to meet these requirements, it can lead to the revocation of your installment agreement. The IRS doesn’t continually track your finances but focuses on your ongoing commitment to fulfill your tax obligations.
- Missed Payments: If you miss a scheduled payment within your installment agreement, the IRS will generally provide you with a grace period of 30 to 60 days to rectify the issue. During this time, they may issue a warning letter to notify you of the missed payment and give you an opportunity to reinstate the payment arrangement.
- Significant Financial Changes: Your financial situation can change, either for the better or worse. If your financial circumstances take a downturn and your installment agreement becomes a hardship, you should promptly contact the IRS to discuss the situation and potentially renegotiate the terms. However, it’s important to note that the IRS’s ability to review these changes may be limited due to resource constraints.
- Inaccurate or Incomplete Information: If the IRS discovers that you provided inaccurate or incomplete information during the initial installment agreement process, such as failing to disclose additional income sources or hiding assets, it could lead to the revocation of the agreement. However, due to resource limitations, such occurrences are relatively rare with the IRS at this time.
Before the IRS revokes your installment agreement, they typically issue a CP-523, which is a Notice of Intent to Terminate Your Installment Agreement. Like most collection actions by the IRS, this notice is subject to appeal. You can file IRS Form 9423, Collection Appeal Request, to dispute the decision and seek a review of your case.
If things change, can I revise my Installment Agreement?
Revising or modifying an installment agreement with the IRS is indeed possible, especially when you encounter difficulties in making the scheduled payments. This flexibility can be particularly relevant in situations where a passport revocation is involved, and a taxpayer is in a hardship situation.
Initially, to resolve a passport revocation issue and regain their passport promptly, a taxpayer may agree to any payment arrangement the IRS dictates. This may involve temporarily agreeing to terms that are less favorable or affordable due to the urgency of the passport matter.
Once the taxpayer has successfully regained their passport, it’s advisable to revisit the payment arrangement with the IRS to seek more manageable terms. This can involve renegotiating the payment schedule, reducing the monthly payment amount, or exploring other options that align better with the taxpayer’s financial situation.
In some cases, if the taxpayer’s financial hardship persists or worsens, they may qualify for “uncollectible” status. This means that the IRS recognizes the taxpayer’s inability to pay at the moment due to financial constraints. In such situations, the IRS may temporarily suspend collection efforts while the taxpayer’s financial circumstances are reevaluated periodically.
Seeking the guidance of a tax professional or attorney can be beneficial in the renegotiation process. They can help advocate for more reasonable terms and navigate the complex procedures involved in revising or modifying installment agreements.
It’s important to communicate with the IRS promptly when you encounter difficulties with your payment arrangement to avoid potential issues, such as defaulting on the agreement. Keep in mind that while regaining your passport may necessitate initial concessions, there is room for negotiation and modification once the immediate issue is resolved.
What if I owe both state and federal taxes?
When you owe both state and federal taxes, it’s often advisable to prioritize setting up a payment arrangement with the state tax authority first. Here’s why:
- State Tax Agencies Can Be More Aggressive: State tax agencies can be more assertive and less flexible in their collection efforts compared to the IRS. They may not allow you to pay your federal taxes before settling your state tax debt. Ignoring your state tax obligations could lead to additional penalties, interest, and enforcement actions by the state, which can compound your financial challenges.
- Cooperation Between IRS and State Tax Authorities: The IRS typically recognizes state tax payment arrangements and can work with you to ensure that you are meeting your federal tax obligations while addressing your state tax debt. By resolving your state tax issues first, you can often avoid potential conflicts between federal and state tax authorities.
- Minimizing Legal Actions: State tax agencies may be quicker to pursue legal actions, such as wage garnishments or bank levies, to collect outstanding tax debts. Addressing your state tax debt promptly can help prevent such actions and reduce the stress associated with aggressive collection efforts.
- Preventing Tax Liens: State tax agencies can also place tax liens on your property, which can affect your credit and your ability to sell or refinance assets. Resolving your state tax debt can help prevent the placement of these liens.
However, it’s essential to remember that every situation is unique, and the best course of action may vary based on your specific circumstances. Consulting with a tax professional or attorney experienced in both federal and state tax matters can help you develop a personalized strategy for managing and resolving your tax debts effectively. They can provide guidance on the order in which to address your tax liabilities and navigate the complexities of dealing with multiple tax authorities.
Can I do an Offer in Compromise?
The process of obtaining an Offer in Compromise (OIC) from the IRS can vary over time, with the IRS sometimes being more accommodating and at other times more stringent in its criteria for accepting OICs. State tax agencies, on the other hand, have historically been less lenient when it comes to accepting OICs. They tend to have stricter guidelines and fewer resources available for negotiating settlements. As a result, securing an OIC for state taxes can be challenging, especially for taxpayers who owe state tax debts.
Under Internal Revenue Code Section 7122, taxpayers have a statutory right to submit an Offer in Compromise to the IRS. However, it’s important to understand that the IRS retains discretion in accepting or rejecting OICs based on various factors, including the taxpayer’s financial situation and the amount of the offer.
When you submit an OIC to the IRS and it is accepted for processing, the collection statute is typically tolled. This means that the IRS stops the clock on its ability to collect the tax debt while the offer is under review. Given the IRS’s budget constraints and the potential time it may take to process an OIC, it’s essential to consider the impact this might have on the collection statute.
The IRS generally has ten years from the date of assessment to collect back taxes. Submitting an OIC on taxes that are approaching this ten-year limit can be risky. If the OIC is not accepted, it may indeed extend the collection period, potentially affecting when the tax debt would otherwise drop off.