Escape route

Entrepreneur, Nov, 1997 by Joan Szabo

It happens every now and then: A financial bump in the road causes you to fall behind in your federal tax payments. Sales may take a sudden downturn or a serious illness strikes, and you put your tax bill on a back burner.

Don't despair. There are ways to get back into the government's good graces. The IRS offers several payment plans; the condition of your balance sheet and your current income stream dictate which one is for you.

While the IRS expects you to pay your taxes on time each year, it is ready to work with business owners who find themselves in financial hot water. Becoming a delinquent taxpayer comes with some unpleasant consequences. You must pay not only the taxes owed but also interest and penalties, which continue to accrue until you settle with the IRS.

Beyond the mounting tax bill, the collection process can get ugly. "Revenue agents can put padlocks on your business and shut you down if you don't take the necessary steps to pay the IRS," says CPA Steve Halt with the Alexandria, Virginia, accounting firm Halt, Thrasher & Buzas.

There are essentially two payment options available if you're in a bind. The first one is the installment plan, which lets you pay a designated amount on a regular basis until taxes, penalties and interest are completely paid off. To apply, send in Form 9465, the Installment Agreement Request, and propose a payment plan. If you owe less than $10,000, a detailed financial statement is not required.

Use of the installment plan is on the rise. The IRS reports that the number of taxpayers using the installment payment plan has more than doubled in recent years, increasing from 1.1 million in 1991 to 2.6 million in 1996.

The second payment option, the "offer in compromise" (OIC) program, is also seeing greater use lately as the IRS attempts to collect some of the existing $100 billion in unpaid taxes. OIC gives taxpayers in serious financial trouble an opportunity to settle their tax bill by paying less than they actually owe.

* MAPPING IT OUT

If you're facing a tax payment hurdle, contact the IRS as soon as possible. "Don't waste time by thinking your tax problem will go away because it won't," warns Halt. If you ignore the problem, the IRS will begin sending you collection letters, and these can be intimidating, he adds.

The IRS also has the authority to take enforcement action against you. In addition to closing down your business, the agency can file a lien against your assets, seize bank accounts or sell your property.

To see if you qualify for an OIC, you will need to fill out Form 433-B, Collection Information Statement for Business, along with OIC Form 656. Individuals and sole proprietors need to complete Form 433-A, Collection Information Statement for Individuals, instead of Form 433-B. These forms provide the IRS with comprehensive financial information about your assets, liabilities and income. You can request the forms by calling (800) 829-1040.

The 656 form was recently revised to cut down on the number of OIC forms the IRS was unable to process due to incomplete information, according to an IRS official. The IRS discovered that taxpayers weren't supplying all the necessary financial information, and that the taxpayers' offers didn't reflect all their equity and assets, he says. The revised form specifically states that a revenue officer will review your offer package to be sure you accurately included information regarding all your assets and income. If you submit incomplete financial information, the entire package will be returned to you.

When submitting your offer package, you must also indicate the total amount of taxes you believe you can pay. The IRS will then determine whether you qualify for an OIC.

The IRS is giving OICs more serious consideration now because it has found that installment agreements don't always produce the desired results. In some cases, the amount of accruing interest and pen-

alties on outstanding taxes is so great that regular payments don't begin to adequately chip away at the principal. In others, the taxpayer doesn't have much in the way of assets. Says Halt, "The taxpayer may have cashed in all retirement funds, borrowed all the equity in his home, and simply lacks the income stream to pay back the IRS."

* MEANS TO AN END

The IRS agrees to accept less than the full amount of outstanding taxes, interest and penalties when it is confident it will never be able to collect the taxes you actually owe, says attorney Elliott H. Kajan, a principal with the Beverly Hills, California, law firm Kajan Mather and Barish, who has helped negotiate a number of OICs.

The goal of an OIC is to reach a compromise that's in the best interest of both the taxpayer and the government, says an IRS official. "If we can collect more [funds] through other means, we would have to explore those other means of collection," he says. If the IRS finds, for example, that it can collect the entire amount you owe through liquidation of your assets or from future earnings, it will pursue those options instead of agreeing to an OIC.