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Options for Individual Taxpayers Attempting to Resolve Federal Tax Debts

On Behalf of | Sep 18, 2020 | Firm News |

According to Benjamin Franklin, nothing is certain but death and taxes.[1]  This idiom is especially relevant and true for those unfortunate taxpayers that attempt to revolve and settle their tax debts or disputes with the Internal Revenue Service, or IRS.  The IRS is a federal agency, and a bureau of the United States Department of the Treasury, and it is tasked with collecting federal income taxes and other related revenue.[2]  While income tax revenue is of course needed to help provide funding for important and necessary government programs and expenses, like Medicare and Social Security, it would also appear that the IRS can be very hesitant and intractable when asked to forgive, and/or forestall collection of, someone’s tax debt, because by doing so, the IRS could be forgoing and/or forfeiting any future collection efforts against those taxpayers that have their debts reduced or forgiven.  The IRS appears to provide some options for those people who are unable to pay their tax arrearages, but two of the more well-known alternatives for individual taxpayers who absolutely cannot afford to pay their federal tax debts are to either have those unfortunate persons placed in what is called Currently Non-Collectable Status, or to allow those taxpayers to completely settle their tax debt through what is termed an Offer in Compromise, or OIC.  Of these two choices, probably the easiest one to obtain is being placed in Currently Non-Collectable Status.  The back-owed tax debt of those that are placed in Non-Collectable Status does not simply disappear – the IRS just does not attempt to undertake any type of collection action against a taxpayer while that person’s debt is labelled as Currently Non-Collectable.[3]  The individual’s tax debt still exists, and just continues to accumulate penalties and interest.[4]  At such time that the IRS believes or determines that a taxpayer placed in Non-Collectable status is able to resume payment of his or her tax debt, the IRS could resume collection efforts against that person.[5]  The other option mentioned above, the OIC, refers to when the IRS and a taxpayer agree to settle the taxpayer’s debt for an amount less than that of the actual debt,[6] which the taxpayer can either pay off in a lump-sum payment, or through short-term installments.[7]  It appears that OICs are rarely granted, and/or are only granted sparingly.  Moreover, taxpayers that either have prospective OICs currently under consideration with the IRS, and/or have already had their OICs granted and have thus settled their tax debts, still have to file their income tax returns for prospective/future tax years on time, as well as continue to timely make prospective estimated tax payments, or their OICs could be revoked and/or withdrawn from consideration (the latter if their OICs are still in the proposal stage).[8]  Thus, even when individuals have their pending tax debts resolved or forgiven, they still must continue to be mindful of their future tax responsibilities.  Overall, the IRS does not like to give up any collection options available, especially if it ever feels the need in the future to once again to pursue and force payment of an individual’s tax debts and liabilities.

-Attorney Matthew Ludwinski

[1]Letter from Benjamin Franklin to Jean-Baptiste Le Roy, 1789.

[2]www.irs.gov/about-irs/the-agency-its-mission-and-statutory-authority (last updated 9-17-20).

[3]www.irs.gov/taxtopics/tc202 (last updated 7-01-20).

[4]www.irs.gov/taxtopics/tc202 (last updated 7-01-20).

[5]www.irs.gov/taxtopics/tc202 (last updated 7-01-20).

[6]Offer in Compromise Booklet, Form 656 (Rev. 4-2020), p.1.

[7]Id at p.3.

[8]Id at p.6.