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Navigating through IRS or state tax agency enforcement actions can be overwhelming and stressful. Understanding the tools and guidelines used by these agencies is crucial, as it empowers taxpayers to protect their income and assets, and even avoid prosecution in serious cases.

Having professional representation or guidance during such situations is invaluable. A tax professional can assist with preparing delinquent returns, negotiating payment plans, making offers in compromise, or obtaining a currently-not-collectible status. Moreover, they can provide valuable advice on mitigating the consequences of agency actions.

With over 34 years of experience inside the IRS and over 20 years in private practice, I offer comprehensive support to ensure the most favorable outcome for your case. Explore the detailed topics on this subject discussed below to leverage my expertise and successfully resolve your controversy or compliance issues with the IRS and state tax agencies.

• Unfiled Tax Returns
• Installment (Payment) Agreements
• Currently Not Collectible
• Offer In Compromise

Unfiled Tax Returns
If you haven’t yet submitted your federal or state income tax return for the current year or any prior years, it’s essential to do so promptly, regardless of your reasons for not filing on time. The IRS and state tax agencies mandate taxpayers file annual income tax returns if their taxable income including wages, interest, dividends, and self-employment earnings surpasses the minimum filing requirement threshold.

The minimum income filing requirement is typically adjusted annually based on the Consumer Price Index, resulting in a slight increase each year. Information regarding the specific minimum income filing requirements for various years can be found on the official websites of the IRS or state tax agencies, as well as through other sources accessible via search engines like Google.

The IRS stipulates that taxpayers are considered in compliance with filing requirements if they have filed returns for at least the past six years. For instance, in 2024, taxpayers are required to have filed returns for the years 2018 through 2023 to be deemed compliant with filing regulations. State tax agencies may or may not have similar policies. Some state agencies, such as the CA Franchise Tax Board (FTB), may expect taxpayers to file all overdue returns dating back to the extent of available records.

What are the consequences if a taxpayer fails to file returns? In the most severe cases, willful failure to file constitutes a crime, and the taxpayer may face prosecution. More commonly, the IRS and state agencies reserve the right to prepare a return on behalf of the taxpayer, known as a “substitute for return,” which often results in a higher liability than if the taxpayer had filed an accurate (albeit late) return. Fortunately, if the IRS or state agency prepares and assesses a substitute for return, the taxpayer still has the option to prepare and submit a delinquent return to mitigate the assessed tax liability. Taxpayers may also incur a late filing penalty if their return is overdue.

There is no civil penalty for failure to file if a refund is due. However, there is a risk of forfeiting the refund entirely if a return claiming a refund is filed after the statute of limitations expires. Generally, an original return claiming a refund must be filed within three years of its due date for the refund to be allowed in most cases. After the expiration of this three-year period, the refund statute typically prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other underpaid tax years.

If a taxpayer has outstanding tax liabilities and wishes to settle them through an installment agreement or an Offer In Compromise, neither of these options is available if the taxpayer is not in compliance with filing requirements. For taxpayers not in filing compliance, their primary objective should be to file their overdue returns.

I offer the software and expertise necessary to prepare delinquent income tax returns for the current year as well as past tax years for any state within the United States. Contact me for more information and to arrange for the preparation of your delinquent returns.

Installment (Payment) Agreements
Receiving a tax bill from the IRS can be a daunting experience, but addressing it promptly is crucial to avoid enforced collection actions. While paying the full amount before the due date is ideal, many taxpayers face financial constraints, especially during challenging times. Fortunately, the IRS offers alternatives, such as setting up an installment agreement to help manage tax debts.  Most every state tax agency also offers installment agreements, but I will focus here on the IRS process.

An IRS installment agreement, commonly known as a payment plan, allows taxpayers to pay their federal tax bill in monthly installments over a period of time. These agreements can be arranged online, by phone, by mail, or in person, offering both short-term and long-term options.

The short-term installment agreement allows taxpayers to settle their tax debt within 180 days. The long-term option extends the repayment period up to six years for those needing more time. Choosing the right plan depends on the amount owed and the monthly payment you can afford. It’s important to note that interest and late payment penalties continue to accrue during the repayment period.

Most taxpayers are eligible for an IRS installment agreement, provided they owe less than $100,000 in combined tax, penalties, and interest, have filed all tax returns for the past six years, and can repay the debt within 180 days. Those owing $50,000 or less may qualify for a long-term plan if they need more than 180 days to settle their tax bill.

If you’re ineligible to set up a plan online, you can still apply by mail or phone. Reasons for ineligibility may include nearing the expiration of the 10-year collection statute on a tax year with a balance due.

Installment agreements can be either full pay or partial pay. Full pay agreements ensure that all outstanding balances are paid before the expiration of the 10-year statute, while partial pay agreements involve paying the maximum affordable amount but may not fully settle all tax periods within the timeframe.

For larger liabilities or partial payment agreements, the IRS typically requires a completed Collection Information Statement, such as Form 433-A, 433-F, or 433-B for businesses. These forms detail income, expenses, assets, and liabilities to determine the monthly payment expected from the taxpayer.

While there’s more to know about IRS installment agreements, discussing your specific financial situation with a professional during a consultation is advisable. Ultimately, payment plans offer a viable solution for many taxpayers, and seeking assistance from a representative familiar with the process can often lead to better outcomes.

Currently Not Collectible
Let’s assume that you owe the IRS $20,000 for back taxes. You recently lost your job and are receiving unemployment which barely covers your basic living expenses. You have next to nothing in your bank account and minimal other assets. There is no way you can make any monthly payment toward your liability. What will the IRS do in this situation? Hopefully you or your representative can convince the IRS your case should be classified as Currently Not Collectible.

What is Currently Not Collectible status?
Currently Not Collectible (often referred to as “CNC”) is a case status reflecting the IRS’s conclusion that a taxpayer has no current ability to pay their delinquent federal income taxes.

Generally, the IRS will place a taxpayer’s case in this status for one of two reasons:  

Offer In Compromise
The Offer in Compromise (referred to most often as “OIC”) program provides an opportunity to settle your tax liabilities with the Internal Revenue Service (IRS) for less than the full amount owed. For your information, most states have a similar program.

There is a lot of media advertising with firms stating they can help clients resolve their IRS liability for cents on the dollar. That is misleading as it is a challenging process that takes time and experience to successfully negotiate an OIC. Unfortunately, many taxpayers fall for this advertising and end up paying fees with little likelihood of success getting their OIC accepted.

To qualify for an OIC, specific criteria must be met, including the filing of all tax returns (a minimum of the last 6 years), receipt of a bill for at least one tax debt included in the offer, and compliance with estimated tax payments or sufficient withholding to cover the accrued wages and other income for the current year. For businesses, companies must fully comply with federal tax deposit requirements for business owners with employees.

It’s important to note the IRS typically accepts an OIC only if the amount offered is equal to or greater than the reasonable collection potential (RCP). An IRS employee will thoroughly evaluate your ability to pay based on assets, income, and allowable expenses. There is a very in-depth collection information statement (financial statement) – form 433-A(OIC) that must be completed and submitted as part of the offer package. The accurate completion of that form with supporting documentation is critical to acceptance of the OIC.

There are three main reasons the IRS may accept an OIC:

  1. Doubt as to liability: When there’s a genuine dispute regarding the existence or amount of the correct tax debt. For example, an audit may have been conducted, but documents that were previously unavailable during the audit can now be presented to reduce the revised tax liability.
  2. Doubt as to collectibility: If your assets plus the sum of the potential monthly payments (based upon your income less allowance expenses) are less than the full amount of the tax liability. In other words, there is no way you can pay off in full what you owe (including the accrual of interest and penalties) before the 10-year statute for collection expires.
  3. Effective tax administration: When paying the full amount owed would create economic hardship or be unfair due to exceptional circumstances. This is the least common form of OIC and the most challenging to get accepted.

The specific forms required for submission depend on the basis of the OIC. A non-refundable application fee (currently $205) is generally required, except for cases based on doubt as to liability or for individuals who qualify for the low-income exception.

Payment options include lump sum cash offers or periodic payment offers, each with specific requirements and nonrefundable payments. Generally, a lump sum offer requires a smaller overall payment than a periodic payment offer.

If your OIC is accepted, you must comply with all tax laws, including the timely filing returns and paying taxes for five years from the date of acceptance. Failure to comply may result in default, leading to collection of the original amounts owed plus interest and penalties.

If your OIC is rejected, you have the right to appeal within 30 days. However, if the offer is returned due to missing information or other reasons, there is no right to appeal but you may resubmit the offer once the issues are resolved.

We hope this information helps you understand the OIC process. Please feel free to reach out if you have any questions or need assistance. The OIC process can be very challenging. Retaining a skilled and experienced professional to represent you can significantly improve the probability for OIC acceptance.