Pay the Tax / Minimize the Tax
In most situations, this is not an option.
Most taxpayers we see
simply do not have the money nor the assets, and
even if they did, they could not liquidate their assets
or pay the liability without hurting their business or
If it is an option, then consideration can be
given to minimizing the tax through a penalty abatement,
offer - in - compromise based upon doubt as to
liability, additional deductions claimed through an
amended return, request for audit reconsideration, etc.
Non-Cooperation / "Hard
Not cooperating with the Internal Revenue Service is an
approach that is rarely used and is only appropriate in
A failure or refusal to cooperate with Internal
Revenue Service usually results in immediate enforcement
collection action such as filing Notices of Levy on bank
accounts or on wages, seizure of assets with equity,
closure of business, etc. Accordingly, this option is
generally only available to those individuals who have
little assets at risk and have the ability to easily
change employers or go from job to job by the nature of
IRS terminology, having an account "53'd"
means that the account is temporarily written off as
currently uncollectible. In the event a taxpayer does
not have any ability to make payments to Internal
Revenue Service under an Installment Payment Agreement,
then he or she may be eligible to have her account
temporarily written off for re-evaluation in the future.
Typically, IRS will re-evaluate his or
one (1) or two (2) years later.
Historically, an Installment Payment Agreement is
the most common type of arrangement with Internal
Revenue Service for those individuals who cannot full
pay a federal tax liability.
For smaller dollar amounts, an Installment
Payment Agreement may be reached without providing
detailed income or financial information to Internal
Revenue Service. For
larger dollar cases, the Internal Revenue Service will
generally insist on receiving a Collection Information
Statement detailing your assets, liabilities, income
sources, and expenditures.
October of 1995 the
IRS changed its
procedures with respect to Installment Payments
changes included standardizing or capping the amount of
expenses one may claim for certain types of living
expenses, for transportation costs, and for housing and
utilities costs. In
many, if not most situations, these standardized amounts
are unfavorable to the taxpayer.
In our opinion, the standardized amounts are
unworkable for higher income individuals, and should
either be substantially modified or abandoned by
Internal Revenue Service. In the interim, it is our
impression that these rigid requirements are forcing
more individuals into filing bankruptcy.
For those taxpayers who cannot fully pay their
back taxes, the IRS now accepts Partial Pay Installment
These are automatically reviewed, supposedly on a
priority basis, within two (2) years.
Wait Out Statute of Limitations
general, there is a ten (10) year statute of limitations
on Internal Revenue Service collecting the amount of an
assessed tax. This
is referred to as the Collection Statute Expiration Date
The ten (10) years starts running from the time
of the tax assessment, not the time the taxpayer
files the return, sets up an installment payment, a
Notice of Federal Tax Lien is filed, or any other date.
There are certain events such as filing
bankruptcy, filing an Offer - in - Compromise, filing a
Collection Due Process Appeal, filing a formal request
for an Installment Payment Agreement, or being outside
of the country for a period exceeding six (6) months
which toll or suspend the statute of limitations.
A precise determination of when the statute of
limitations expires cannot be made until a review of the
transcript of account and interview of the client.
Also, the Internal Revenue Service may request
that the taxpayer extend the statute of limitations for
up to an additional five (5) years from when the statute
would normally expire.
For some taxpayers, there are certain techniques
or procedures which can be used to protect themselves if
they choose to refuse to extend the statute of
for those taxpayers who cannot necessarily protect
themselves, there are still certain strategies or
techniques to be considered or employed to minimize the
consequences (or at least which should be discussed in
making a decision on whether to extend or not).
Innocent Spouse Relief
Internal Revenue Service Restructuring & Reform Act
of 1998 greatly expanded spousal relief for taxpayers
who filed joint Federal Income Tax returns.
Although a complex area, in general, three (3)
separate types of relief may be granted depending upon
whether the tax liability arose because of an audit
assessment, as part of a jointly filed return with a
balance shown as due and owing, and based upon the
current marital status of the parties.
The three (3) categories are:
Spouse Relief - Tax liability is a result of a
tax understatement by non-innocent spouse due to an
erroneous item on the return.
A spouse may be entitled to relief if she either
did not know of a substantial understatement of income
or overstatement of expense or did not understand the
nature or extent of such understatement of income or
overstatement of expense.
of Liability Relief - Tax liability is a result,
in part, of a tax understatement by non-innocent spouse
due to an erroneous item on the return.
A spouse may make an election to have the
liability allocated between spouses (the individuals
must be no longer married or legally separated or living
apart for at least twelve (12) months).
or Equitable Relief - Tax liability is a result
of either a tax understatement or an underpayment and
innocent spouse does not qualify for two (2) other forms
of relief. The
Internal Revenue Service determines that it is unfair to
hold the innocent spouse liable for the payment of tax
(partially or in whole) taking into account all the
facts and circumstances.
Offer - in - Compromise
Offer - in - Compromise is a formal vehicle available to
taxpayers to compromise or settle their liability.
It generally works where the taxpayer owes a
large liability, it is unlikely the liability could ever
be paid, and the taxpayer has an "independent"
source of funding for the Offer - in - Compromise.
For IRS to even process an Offer - in -
Compromise, the taxpayer must offer an amount equal to
or exceeding (1) the net equity in assets (realizable
value) plus (2) a mathematical amount calculated on a
monthly installment payment or "ability
The mathematical computation may be estimated by
taking your monthly payment amount as disclosed by the
collection information statement times 48 plus adding
the net value of the assets.
By way of illustration, if taxpayer has $3,000.00
in realizable value in various assets and his proper
monthly installment payment were $100.00, then the
minimum amount which must be offered for the Offer - in
- Compromise to be processed is $7,800.00.
This is calculated by taking the $100.00 monthly
payment amount times 48 and adding to it the $3,000.00
net equity in assets.
Unfortunately, the Jacksonville District has
historically had one of the
lowest acceptance rates of Offer - in -
Compromises in the country, which we heard for one (1)
year in the 1990s was only eleven (11%) percent.
We have heard the current acceptance rate is
approximately twenty (20%) percent of legitimate offers.
IRS also implemented a deferred payment Offer - in -
Compromise which is essentially a combination of an old
lump sum offer with an Installment Payment Agreement.
Under this situation, the taxpayer must amortize
(or pay during the life of the installment) the
realizable value (equity) in his or her assets.
If amortized, this figure must be added to the
monthly ability to pay.
Unfortunately, those taxpayers who have
substantial equity in assets may find the monthly
payment unacceptable or unrealistic.
The Service also has Effective Tax Administration
offers, which apply in