How to Address COVID-19-Related Tax Collection Issues

August 31, 2020 | Article

By Margarita Stone

Answers to frequently asked questions surrounding tax liability and IRS collections

With all the COVID-19 closures and discussions happening currently, IRS tax collections may not be top-of-mind for you right now. However, it’s good to remain knowledgeable and proactive about the taxes you owe. If your business had to shut down, or if you’re an individual who was furloughed or lost your job, we understand that paying these taxes may be difficult.

If you owe taxes, it’s important to understand certain payment options that are currently available. We’ve outlined some basic guidance for you to consider on how to handle IRS tax collection efforts that should be beneficial to both businesses and individuals who’ve been impacted by the COVID-19 pandemic.

Both businesses and individuals can apply for financial hardship status with the IRS; however, be cautious that you don’t inadvertently make your financial situation worse. You certainly don't want to face paying additional tax penalties and interest.

Don’t let IRS tax collections take you by surprise. Build a strong case with IRS Dispute Resolutions and Collections guidance.

Business Shutdowns and Tax Liability

If your business experienced a closure due to the COVID-19 pandemic, it’s likely your finances have taken a substantial hit and unpaid taxes will add an additional burden. However, there are things you can do that could help, including applying for financial hardship status with the IRS. The following provides some advice to consider.

Q. My business was shut down for several weeks due to COVID-19 and we fell behind in our bills. How do I address my IRS tax liability?

A. If a business taxpayer does not have the ability to pay for their necessary operating expenses, they are probably also behind on taxes. If they are, they can request the IRS place their account in a “financial hardship status.” The IRS refers to a business taxpayer in financial hardship as Currently Non-Collectible (CNC).

For the IRS to place an account in CNC status, the case must be assigned to an IRS Revenue Officer and the business must prove that they are experiencing a hardship. A business taxpayer will be required to provide their financial information, which means disclosing their assets, equity, income and expenses. This may sound easy, but it can be tricky.

Q. What financial information will I need to provide to the IRS?

A. The IRS will want the business taxpayer to provide copies of bank statements, a current profit and loss statement, a list of assets (which includes real property, equipment, and vehicles), a list of accounts receivables and a list of liabilities. Generally, the taxpayer provides their financial information to an IRS Revenue Officer who  will review the information.

After the IRS Revenue Officer reviews the financial information, they may ask for additional information or clarification of the information provided. Once the taxpayer information has been reviewed, the Revenue Officer will provide business taxpayer with an amount the business should be able to pay for taxes. This payment amount may surprise the taxpayer because the net income on the profit and loss statement shows a loss. All this leads to more discussions and hopefully a resolution, but having someone that understands IRS collection procedures will help things get done more to the benefit of the taxpayer.

Q. How does the IRS determine how much my business can pay?

A. The IRS will look at the business taxpayer’s assets, equity and monthly disposable income, meaning they are looking for the cash available to pay taxes. A taxpayer who contacts the IRS on their own does not necessarily know all the rules on how the IRS will process a Collection Information Statement. There are some expenses that the IRS considers to be necessary and others that are not. For example, business taxpayers usually claim depreciation on their profit and loss statements, but depreciation is probably not a current cash payment item and the IRS will disallow the depreciation expense, thereby increasing the amount cash available to pay taxes.

Another example is when a business taxpayer pays personal expenses from their business account and reports the expense on their profit and loss statement. The IRS will disallow the personal expense from the business profit and loss statement as not essential to the business, which increases the cash available to pay taxes.  

Q. What if my current finances are not the same as they had been in past months?

A. The IRS will often request documentation of the business income and expenses over the last year, often focusing on the last three to six months. Unfortunately, that may not reflect your current financial circumstances. It can often take a lot of additional documentation to prove your current financial condition, which is the true ability to pay taxes, has gotten worse.

Additionally, sometimes your obligations may need to be documented in a certain way. Even still, the IRS may not agree to longer term payment options like an offer in compromise or installment agreement based on a change in your circumstances for one month or two period, and instead, they will want to see if your circumstances improve in the next few months, which could lead to having a greater ability to pay taxes.

Q. What can I do if they won’t agree to an installment agreement?

A. First, make sure the information that the IRS is using to make their decision is the information that you have provided. If it is different, work through the documents again and see if the decision changes. If there is no change and you are convinced no cash is available for taxes using the IRS guidelines, request a financial hardship status—particularly if there are no assets with equity—so there is no ability to borrow to pay taxes. There is a possibility that such a business owner could be placed in a financial hardship status for the next 12 or 24 months. Once placed in a financial hardship status, if the IRS has not done so already, they will file a Federal tax lien to protect their interest. The IRS can request updated financial information to see if the situation has changed (i.e. the business taxpayer is making more money and has money left over at the end of the month to pay the back taxes).

If the business taxpayer’s financial situation gets worse and there are no assets with equity, another option may be a settlement with the IRS. A settlement with the IRS is through the offer-in-compromise unit and the request (with the supporting documentation) must be mailed to the IRS for review. This process can take at least 9-12 months and can be longer if the case goes to appeal.

There are options available to taxpayers depending on their ability or inability to pay their back taxes, but it may require the guidance of a tax professional.

If you aren’t able to pay back taxes, there is help available.


Q. Are personal taxes handled different than business taxes?

A. Similar to business tax payments outlined above, individuals who’ve been furloughed or laid off may need to apply for financial hardship if they aren’t able to pay their back taxes. In addition to relief offered by the CARES Act, here is a way for individuals to apply for financial hardship status.

Q. I was furloughed (or laid-off) from my job and have an IRS tax debt that I cannot afford to pay. What can I do?

A. Request financial hardship. If a taxpayer does not have the ability to pay for their necessary living expenses, including taxes, he or she can, just like a business, request financial hardship status.

The IRS refers to a taxpayer in financial hardship as Currently Non-Collectible (CNC). For the IRS to place an account in CNC status, the taxpayer must prove that they are experiencing a hardship. A taxpayer will be required to provide their financial information which means disclosing their assets, equity, income and expenses. This requires providing the IRS with lots of information.

Q. What financial information will I need to provide to the IRS?

A. The IRS will want to know a taxpayer’s banking information, any investments that they have, and assets (which include real property, vehicles, etc.), proof of income and expenses. Generally, a taxpayer will list all their expenses and contact the IRS to request financial hardship because they cannot afford to pay all their bills.

The IRS will want to know how much cash, according to their rules of application, a taxpayer will have to pay taxes. Things a taxpayer may believe are qualified will often not qualify, which sets up confusion and frustration for the taxpayer. But in this process, the IRS is in control. Just make sure the information you have sent in is being used to make the IRS decision. If the information the IRS is using is correct, and they won’t move on the cash they think is available for paying taxes, it is probably time to call in some professional tax assistance to help resolve the problem.

Q. How does the IRS determine how much I can pay as an individual?

A. The IRS will look at your monthly disposable income. Unfortunately, a taxpayer that contacts the IRS on their own does not necessarily know all the rules on how the IRS will process a Collection Information Statement used to gather all types of financial related information for them to understand how much cash could be available to pay taxes. There are some expenses that the IRS considers to be necessary and others that are not.

For example, a taxpayer’s credit card payment each month is $500. Credit card payments are disallowed because IRS taxes have payment priority over credit card debt.

As another example, the taxpayer, who is divorced, has agreed to give his ex-wife $500 per month to help provide for their child. If there is a court order, the payment is allowed. However, if there is no court order (for child support), the IRS can disallow the expense as a necessary living expense.

In summary, the two examples could show the IRS the taxpayer has the ability to pay them $1,000 per month for taxes.

Q. What if my current personal finances are not the same as they had been in past months?

A. Like for businesss, the IRS will often request documentation of individuals’ income and expenses over the last year, often focusing on the last three months. Unfortunately, that may not reflect your current financial circumstances. It can often take a lot of additional documentation to prove your financial condition has gotten worse. Additionally, sometimes your obligations may need to be documented in a certain way.

Even still, the IRS may not agree to an offer in compromise or installment agreement based on a change in your circumstances for one or two month, and instead, will want to see if your circumstances improve in the next few months.

Q. What can I do if they won’t agree to an installment agreement?

A. Check to see if other potential deferral options in tax payment are available, such as the financial hardship status. If the necessary living expenses are within the IRS allowable standards, and the expenses, exceed the monthly income, there are no assets with equity, so the taxpayer does not have the ability to borrow. This taxpayer is likely to be placed in a financial hardship status for the next 12 or 24 months.

Once placed in a financial hardship status, if the IRS has not done already, they will file a Federal tax lien to protect their interest. The IRS can request updated financial information to see if the situation has changed (i.e. the taxpayer is employed and is able to pay their bills and have money left over at the end of the month to pay the back taxes). If, once the taxpayer gets a job, the job does not pay enough to cover the bills (and there are no assets with equity), another option may be a settlement with the IRS. A settlement with the IRS is through the offer-in-compromise unit and the request (with the supporting documentation) must be mailed to the IRS for review. This process can take at least 6-9 months and can be longer if the case goes to appeal. If using this approach, professional tax assistance would be best.

Navigating the tax collections process can be complex. Whether you’re a business with lost revenue due to shutdown or an individual who’s been furloughed/laid off, you can apply for financial hardship status with the IRS. It’s reassuring that there are options available to taxpayer, however, it may require expertise from tax professionals. You want to make sure that the IRS does not take any enforced collection action against you.

When working with the IRS, building the best case to support you is important, but it can be a complex process.

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