People ask all the time, “I owe the IRS a lot of money. Is there any way out?”
There’s actually six possible solutions and we’re going to take just a moment and talk about each of those six possible solutions.
The first thing, inevitably, that people want to talk about is something called an Offer in Compromise (OIC). An Offer in Compromise is actually a deal to settle for less. The IRS has made a big deal lately that they don’t want people advertising that you can settle for pennies on the dollar but it sometimes is possible.
An Offer in Compromise is based upon a complex algebra problem that goes something like this:
Monthly disposable income x 48 + assets = the amount of your cash offer
There’s something else called a short-term deferred offer and a long-term deferred offer, and we’re going to talk about those in a later article.
The second possible solution is something called an installment agreement. What’s an installment agreement? It’s exactly what it sounds like. An installment agreement is nothing more than a payment plan. There are payment plans (installment agreements) that will full pay the liability and there are installment agreements that sometimes only partially pay the liability. That will be the subject of a later article, as well.
The third solution is something that is very unique – and a lot of people don’t understand that – and that is, that there is actually a collection statute of limitations for the collection of income tax liability. What people don’t understand is that the IRS only has 10 years from the date of the assessment of the tax to collect that tax.
What does that mean? Well, in English it means pretty much that the IRS has a limited timeframe from which they can collect that tax. So it’s important that you know when that date started to run and more importantly, when that date is actually expired. If the date has expired then the IRS cannot lawfully collect the tax and they have to release all liens, levies, etc.
The fourth option is actually something called hardship status. You might also hear us call it “currently not collectable” or “status 53.” Those things all mean that the IRS, after doing a thorough financial analysis of your financial situation has determined that they have no ability to collect from you on a monthly basis. In other words, you cannot afford to pay anything on a monthly basis. Is hardship status a final solution? Not necessarily. It can be used in conjunction with the collection statute expiration date that we just talked about just a moment ago but it’s not, in and of itself, a solution. Typically, the IRS will put you in hardship status for a year or two at a time and revisit your financial situation, in a year or two, and determine at that time whether or not you have any ability to pay on a monthly basis.
The fifth option is something even more unusual. A lot of people really don’t get this and that is that bankruptcy can discharge taxes in certain circumstances. That’s something that’s very complex and will also be the subject of a later article.
The sixth option is something called innocent spouse relief. Innocent spouse relief is also very complicated. There’s actually three types of innocent spouse relief, and we’ll get to those in a later article as well. Typically, if your spouse did something to cause a large tax liability that you were unaware of, or that you had nothing to do with, in certain circumstances, you can get relief by filing for innocent spouse relief.
Now, if you meet with an organization or individual who can, out of those six possible solutions, claims that they can go ahead and pick the magic pill and pick which solution is the best for you after just a short conversation, I think you need to keep looking. Each of these solutions is complicated in and of itself and requires a detailed financial analysis before you can decide which of these solutions is the best for you.