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Options for resolving high tax delinquencies

On Behalf of | Mar 10, 2022 | Internal Revenue Service

Debts can make anyone feel overwhelmed; however, there are few creditors that most U.S. consumers fear more than the Internal Revenue Service (IRS).

There are many ways to find yourself owing $50,000, $100,000 or even $200,000 or more to the IRS. For example, you may have neglected to pay capital gains taxes when making an early withdrawal of funds from a 401(k) or have not paid your businesses’ payroll or sales and use taxes.  

If there’s one detail often reported about the IRS, it’s how they are aggressive in pursuing both individuals and companies who avoid or fall behind in paying their taxes. 

While you may envision the IRS’s version of aggressive pursuit of taxpayers involving the seizure of property or incarceration, that is not generally the IRS’s initial approach to dealing with delinquencies. There are instead many ways in which the IRS might work with taxpayers with high tax amounts owed, as detailed below. 

Installment plans that the IRS offers

There are two installment plans that the IRS offers. These include:

Long-term payment plan: Individuals wishing to apply for this repayment option must only have a $50,000 maximum in outstanding taxes, interest and penalties due.

Short-term payment plan: Taxpayers with up to $100,000 in outstanding taxes, penalties, and interest may qualify for this payment plan option. 

Taxpayers that have outstanding tax balances that surpass the $50,000-$100,000 cap described above may need to assume an equity line of credit against their mortgage or make a withdrawal from their 401(k) to pay down the taxes to qualify for a payment plan.

Petitioning the IRS for an account change of status

One option also available to taxpayers if they cannot currently afford to pay off their tax delinquency is to petition the IRS to put their account in a “currently not collectible” status. 

The IRS has a Collection Information Statement that they may require a taxpayer to complete, documenting how insolvent they claim to be. Any taxpayer who pursues this option can expect the IRS to require them to recertify their financial status each year. A repayment plan may be instituted when a taxpayer’s monetary situation improves. The IRS may also file a tax lien against a taxpayer to ensure that they reserve their right to collect the back taxes that they are owed. 

Pursuing an offer in compromise

If the prospect of paying a significant sum in taxes doesn’t seem plausible, then taxpayers may be able to pursue an offer in compromise. This option involves a taxpayer settling their tax burden for less than they originally owed. 

The IRS generally reserves this tax settlement option for taxpayers who would experience financial hardship if they were to pay off the full amount of delinquent taxes due. The IRS generally only agrees to one-half the offer in compromise requests that they receive. 

One of the biggest mistakes you can make is to ignore communication that the IRS sends you. This may result in the IRS intercepting your tax refunds, revoking your passport, seizing funds in your bank account or garnishing your wages and other adverse situations. 

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