When You Can't Pay the IRS

USA Today (Society for the Advancement of Education), July, 2000 by Jeff A. Schnepper

YOU'VE COMPLETED YOUR TAX RETURN on time, but you still owe a whole lot of money. Maybe the kids got sick or you just didn't pay attention. The bottom line is that you've got this big tax bill in front of you and just don't have the cash to pay it. Your credit cards are tapped out, and a home equity loan is only available for those who actually have some equity. You owe the Internal Revenue Service and expect a gorilla to knock on the door and initiate "collection procedures" any day now. What do you do?

Don't panic! You're not going to jail and probably won't get beat up physically. In fact, if you follow the suggestions below, you might get off with some dignity intact and maybe even with a few dollars left in your wallet.

First, make sure you file your tax return. There are penalties for not filing as well as penalties for not paying. Even if you can't pay--file! You can't go to jail because you don't have the money to pay your tax bill. You can go to jail for not filing. It's a criminal act and you're not a criminal, so get that return in the mail.

If you file and don't pay in full, the IRS computers will automatically send you a letter asking for the tax due and any interest from the due date. What if you still can't pay? Ask for an Installment Plan. In fact, the IRS website (http://www.irs.gov) has an interactive calculator that helps you figure the monthly payment amount and actually prints out an Installment Agreement for you to file.

If you qualify for a "streamlined" agreement--generally, if you owe not more than $25,000 and will be able to pay it off within five years--you can find out about how long the payments will last. The true length of your payments depends on how much you owe and the interest rate charged. Since that rate changes every three months, these figures must be estimates, not guaranteed maximum payments. If the interest rate drops, you may pay over a shorter period of time.

If you don't meet the criteria for a "streamlined" agreement, you can compare your monthly expenses to the amounts allowed under the IRS's Collection Financial Standards to determine an appropriate tax payment amount. You can print out Form 9465, Installment Agreement Request, from the website and mail it to the IRS for review and approval. The site doesn't store or transmit personal data.

What if an Installment Payment just won't work for you? As in the past, you have the opportunity to ask for an Offer in Compromise. Under this program, you pay the IRS, but less than 100% of what's due. There used to be only two situations where the IRS would consider an Offer in Compromise--either there was doubt as to liability or doubt as to collectability. In your case, there's no doubt as to liability. The real issue is whether they can collect.

When reviewing collectibility, the IRS has looked at whether you could ever pay, irrespective of how long it takes and regardless of its economic impact on you. If the troth be known, they would do whatever they could to deny Offer in Compromise relief if there were any arguable position they could take. Since November, 1999, however, the roles have changed! For the first time, the IRS has started accepting applications for a new type of Offer in Compromise plan based on "severe or unusual economic hardship." According to IRS Commissioner Charles Rossotti, "This program creates a new way for the IRS to help some people trapped in severe hardships. We have more power to work with struggling taxpayers trying to settle their tax debt."

You can qualify for this new provision if you have a history of filing and paying your taxes and "collection of the entire tax liability would create economic hardship, or exceptional circumstances exist where collection of the entire tax would be detrimental to voluntary compliance." To apply for this program, you must first submit a copy of Form 656, the standard Offer in Compromise application. As of January, 2000, this. form includes and replaces Form 656-A, which previously had to be filed in addition to the Form 656. This form also can be downloaded from the IRS website above. The IRS has cautioned that this new program is designed only for taxpayers in extreme circumstances. It is not designed for everyone with a financial problem or to be viewed as an invitation to avoid paying taxes.

The new program does reflect a commitment by the IRS to expand access to the

Offer in Compromise program. However, the collection statute of limitations--the time the IRS has to collect the balance due--is suspended during the period under the Offer, as well as while it reviews the Offer application, plus 30 days, plus any time a rejected Offer in Compromise is being appealed.

In making an Offer in Compromise, you can propose to make a lump-sum cash payment or fixed payments over a short-term period. In many cases, people borrow from friends or relatives to eliminate the IRS sword of Damocles over their head. They have to know up front, before they commit any money, that the IRS is going to accept those dollars as payment in full.