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Michigan State University
Michigan State University

Alvin L. Storrs Low-Income Taxpayer Clinic

 

The Three Tools to Resolve an IRS Tax Debt

 

If taxpayers do not voluntarily pay the taxes they owe, and do not enter into one of the three alternative collection tools, then the IRS can take collection action against a taxpayer.  This may include placing liens on property a taxpayer owns, garnishing paychecks, seizing tax refunds, seizing bank accounts, and even seizing Social Security checks.  It is crucial that taxpayers make arrangements to resolve their tax debts.

  1. Currently Not Collectible Status
    If you do not have enough income to pay your reasonable living expenses, you may qualify for Currently Not Collectible status (called "CNC Status"). This is a temporary status in which the IRS will temporarily stop collection activity. The debt will continue to accrue interest. Once the taxpayer begins receiving more income, their status will be evaluated for other collection options. Taxpayers must submit an IRS Form 433-A or Form 433-F with three months of supporting financial documents to request "CNC status."

  2. Installment Agreement
    Most people can set up a payment plan with the IRS online in a matter of minutes. Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed. Alternatively, taxpayers can request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice. IRS installment agreement resources:

    ** Beware that the filing fee to set up an installment agreement (called a "user fee") depends on two factors: how you apply for the installment agreement and what form of payment (check, direct debit, etc.) each month.

     

  3. Offer in Compromise
    If you have heard the commercials stating, "we will settle your taxes debts for pennies on the dollar," this is the program they are referring to. Some struggling taxpayers may qualify for an offer-in-compromise if they can prove to the government that they will will not be able to collect the tax debt within 10 years.  The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.        

    There are several myths about this program that have been purported by for-profit companies:

    • It is a "new program." 
      Truth: this program has been around for decades.

    • You can only settle tax debts that are less than $10,000.
      Truth: companies pick $10,000 because the fees they charge are so high, that most would not bother to pay if they owed less than $10,000.  

    • The IRS is settling tax debts for everybody.
      Truth:  The standard to get an OIC is quite high.  The IRS typically looks at your finances to determine if it could collect your tax debt in full within 10 years.  If the IRS decides it can fully collect the tax in that time period, the IRS will not settle the debt.  Some taxpayers are good candidates for an OIC including: people with permanent physical or mental disabilities, elderly who live on Social Security, homeless, and people with advanced diseases like AIDS and cancer.

    • It is a difficult process that justifies fees of thousands of dollars
      Truth:  This is the gravest injustice.  For-profit companies often take advantage of fearful taxpayers.  The OIC program has a very clear and understandable application.  ALL of the information you need to apply COMES DIRECTLY FROM YOU.  Theses companies charge clients thousands to merely organize the information.  Worse yet, if they do a poor job or you get denied, they usually keep the fees.

Solving a Tax Debt Requires Information and Documents from YOU

Every single tax problem we handle at the Tax Clinic will require you to provide us a current Form 2848 (IRS Power of Attorney Form) and other personal financial documents. In most cases, your are the ONLY person who can provide this information. It is important to collect these documents as soon as possible because the IRS will only accept the three most recent months of documents. Some documents that we may need to help you include:

  • 3 months of banks statements
  • Current lease (if renting)
  • 3 months of utility bills
  • 3 months of cell phone bills
  • 3 months of mortgage statements (if you own a home)
  • 3 months of rent receipts
  • 3 months of credit card statements
  • Proof of Child Support
  • Proof of Judgment Payments
  • 3 months of car payments
  • Car insurance statements
  • Property tax statements
  • Retirement account statements
  • Information regarding your assets
If you have lost past tax records, we can often request transcripts of this information from the IRS. You may also contact current companies you deal with for past statements.

Once we have collected all of your income and expense information, we compare it to the IRS Financial Standards to determine which of the three collection alternatives will work for you.

If you are facing impending garnishment or a lien

The Internal Revenue Code requires the IRS to give a taxpayer a Collection Due Process hearing when it intends to place a lien or levy assets.  The IRS must give the taxpayer written notice and provide the taxpayer with 30 days notice to request such a hearing.  The request is made by submitting a Form 12153.  At the hearing, a taxpayer can request that the IRS accept one of the three tools for collection alternatives, which are either an installment agreement, currently not collectible status, or offer in compromise.  If the IRS decides against the taxpayer, then they may usually appeal to U.S. Tax Court.

If you are contacted by a collection agency on behalf of the IRS

Legislation enacted by Congress in 2015 authorizes designated contractors to collect, on the government’s behalf, unpaid tax debts. Usually, these are unpaid individual tax obligations that are not currently being worked by IRS collection employees and often were assessed by the tax agency several years ago.

The IRS will always notify a taxpayer before transferring their account to a private collection agency (PCA). First, the IRS will send a letter to the taxpayer and their tax representative informing them that their account is being assigned to a PCA and giving the name and contact information for the PCA. This mailing will include a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.

Only three private companies are participating in this program:

The taxpayer’s account will only be assigned to one of these agencies, never to all four. No other private group is authorized to represent the IRS.

Once the IRS letter is sent, the designated private firm will send its own letter to the taxpayer and their representative confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

The private collectors will be able to identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act, and like IRS employees, must be courteous and must respect taxpayer rights.

The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers. But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the United States Treasury. To find out more about available payment options, visit IRS.gov/Payments.

Private firms are not authorized to take enforcement actions against taxpayers. Only IRS employees can take these actions, such as filing a notice of Federal Tax Lien or issuing a levy. To learn more about the new private debt collection program, visit the Private Debt Collection page on IRS.gov.