Insights: Article

Frequently Asked Question: I Suddenly Owe Back Taxes, But Have Limited Income. What Are My Options?

Dealing with IRS Trouble: A Fresh Start

By Andres Jaquez, Leslie Spires

February 21, 2019

Five years ago, Mark’s life looked completely different. After years of development, his business was now thriving as he reached age 65. He was involved in community activities and his financial future looked great. Then, without warning, Mark became ill. Mark was limited in the work he could do in his business. As a result, product delivers fell behind, cash flow dried up and bills went unpaid. To keep his business operating, Mark used money withheld for payroll taxes. But, eventually, it came to the point where his business was still operating, but there was no profit. Mark thought he was doing the right thing by trying to keep his business afloat, but now the IRS is demanding the payroll tax be paid.

Mark begins to wonder if he will ever be able to get this cleared up. He’s afraid the IRS may try to take his home or want money from his retirement. That could create an even bigger problem for Mark because he hasn’t told his wife about the IRS problems he’s facing. And now, surviving on limited business income and some fixed income primarily from Social Security or Social Security disability, Mark doesn’t have the cash to pay the tax bill. It’s a bleak picture, but there are options available:

Installment Agreement (IA): This is one of the most common ways the IRS resolves a tax debt. If Mark has adequate income to cover his monthly expenses, this is likely to be the first option the IRS will recommend. An IA allows a taxpayer to make a specific monthly payment until the debt is paid in full. In Mark’s case, if this is the first tax issue he has had, the Fresh Start Initiative may provide some extra relief.

Partial Pay Installment Agreement (PPIA): If an IRS’ examination of Mark’s financial statement determines he is unable to pay the full tax debt within the terms of a standard IA, he may be granted a PPIA. The IRS does this when a taxpayer does not have the ability to repay what is owed within the 10-year statute of limitations available to collect the tax debt. Instead, they create a payment agreement that allows the taxpayer to pay off part of the liability during that time. The IRS will periodically re-evaluate the taxpayer’s financial situation to determine if they still qualify for a PPIA. If the PPIA becomes too great of a financial burden, there are other solutions.

Currently Not Collectable (CNC): If the PPIA is not an option, Mark may qualify for CNC status. This provision is for taxpayers who are unable to pay their tax debt because of financial hardship. While there are people who try to avoid their responsibility, most people who end up in CNC Status want to pay their taxes but are unable to do so because of their financial situation. If granted, the IRS will review your financial situation periodically. If your income increases, the IRS may ask you to start paying on the tax debt. If your income remains the same, you will remain in CNC. Once your debt reaches the 10-year statute of limitations date, the IRS will cease their collections efforts.

Offer In Compromise (OIC): Unlike a PPIA or CNC, which keep the debt active until it reaches the statute of limitations date, an OIC would allow Mark to resolve the liability by offering a reduced payment to pay the full amount of the tax debt and have any lien filed discharged. If the IRS determines a taxpayer does not have the ability to pay off their tax debt before the statute of limitations runs out based on current financial capability, they may qualify for an OIC. But an OIC is not automatic. The IRS takes time in reviewing OIC requests.

Additional Considerations
Contrary to popular belief, and as portrayed in some advertising, the IRS doesn’t just accept “settlements” a taxpayer offers them. The IRS has clearly defined formulas they use to determine whether a taxpayer is eligible for an IA, PPIA, CNC or OIC. In addition, the IRS typically does not want to put a taxpayer out on the street or create an unreasonable financial hardship. However, generating revenue by collecting taxes is what the collections division of the IRS does, so don’t be surprised if they try to collect as much of a tax debt as quickly as they can.

In addition, it helps to understand that many sources of payment some taxpayers believe are not available to be used by the IRS for tax payments are really available. The IRS can levy as much as 15 percent of your Social Security or use other retirement plans, too. Plus, there is a major requirement when trying to use these options to time pay or eliminate a tax debt; you need be up to date on all filings and current on taxes.

As for Mark, while the IRS provides options for helping to cure his tax debt problems, considering that he hadn’t discussed his existing tax problems with his wife, he may not be as fortunate with that debt in other areas of his life.

Selecting the best solution for your issues with the IRS is critical. Our IRS Dispute Resolution and Collections Team is available to help.


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