Do You Owe The IRS Money But Cannot Pay It?

We all file our tax returns (well most of us anyway) and most of us try to do some planning to minimize the amount of money we give to Uncle Sam.  But sometimes people run into other issues with the IRS.  Suppose you owe the IRS money but you are unable to pay it.  What options are available to you?  Well, there are many options available to taxpayers but which option is the best one for you depends upon your specific circumstances. 

 An Installment Agreement (IA) is a commonly used method of paying off the IRS.  This is an agreement between you and the IRS where you agree to pay the balance you owe over a period of time.  The details of an IA differ depending upon the specifics of the situation.  For example, if the balance owed is greater than $25,000, then the IRS may file a tax lien.  However, if the balance is greater than $25,000 and less than $50,000, then you may be able to avoid this lien by agreeing to a direct debit payment arrangement as part of the IA.  This can get complicated so I will spare you more details but what is important to know is that installment agreements are a great way to get the IRS paid when you don’t have the money to pay them off today.

 The program that everyone hears about on the radio is the Offer In Compromise (OIC).  This is where you settle with the IRS for less than the amount owed (pennies on the dollar as the commercials say).  Everybody that owes the IRS money would love to qualify for this.  However, there are very strict requirements that must be satisfied in order to qualify for an OIC.  While there are different types of OICs, the most common one looks at your income and expenses as well as your assets and liabilities.  The IRS then determines if you have the ability to pay the balance due, either immediately or over time.  If the IRS determines that you do not have the ability to pay it, then the IRS may accept your offer or they may make a counter offer.  (There are times when this becomes a negotiation.)  If the IRS determines that you do have the ability to pay, then they reject your offer.  Another type of OIC is where you have the ability to pay the amount due but doing so would cause hardship to you.  There are many details to Offers In Compromise and strategies that can be implemented.  But you have to keep this in mind: The IRS is not going to forgive you on a balance due out of the goodness of their heart.  The IRS will usually only forgive the balance or a portion of the balance if you convince them that forcing you to pay would cause undue hardship or you convince them that they will get more money from you by accepting your offer than by forceful collection activity.  

 Sometimes you owe the IRS money and you do not qualify for an Offer In Compromise but you still do not have the ability to pay.  You might be able to get the IRS to classify you as Currently Not Collectible (CNC).  In this situation, the IRS does not write off any of the balance but they cease collection activity.  This means no notices of intent to levy, no garnishments, no notices of tax lien filing, etc. and this can be a tremendous emotional relief.  In order to qualify for CNC, you still need to convince the IRS that you do not have the ability to pay the balance due.  Other times, bankruptcy may be your best option.  (Yes, income tax can be discharged in bankruptcy as long as certain criteria are met).  There is also a 10 year statute of limitations on collection activity.  Once this 10 year period passes, the balance is written off by the IRS.

 So you see there are many different ways to deal with the IRS when you owe money and cannot pay it.  Which path is best for you just depends upon your entire situation?  Knowing these programs and implementing some planning can go a long way in getting you the best result possible.