Ways to Reduce the Back-Tax Burden
Many people that find themselves in back tax trouble are certain that the IRS Offer in Compromise (OIC) is going to wipe away their tax debt. I can’t blame them. Settle with the IRS for a fraction of what you owe! Sounds great, doesn’t it?
Well unfortunately, not everyone qualifies for an OIC. But, if you truly do have circumstances that were out of your control or just simply can’t repay your debt, there may be other options for you. There are several ways to reduce the total amount of money you pay toward your IRS tax debt. Let’s take a look.
Currently Not Collectible (CNC)
What Is It? CNC is an IRS resolution that places the taxpayer into a hardship status for a period of time. While in CNC status, the IRS will not expect a payment toward the back-tax debt if the taxpayer remains compliant with current tax responsibilities.
How Will It Lower My Total Tax Payment? CNC status will last for a period of time set by an IRS Revenue Officer (usually for businesses) or until your Total Positive Income (TPI) increases. The IRS evaluates your TPI each year after you file your income tax return. Since the IRS Collection Statute is typically ten years, CNC status could allow you to pay very little toward your overall back tax liabilities.
How Do I Get It? To secure CNC status you must prove to the IRS that making a payment toward the back taxes will cause you or your business a hardship. You must have no accessible equity in assets and those assets must be necessary for the health and well being of your family or the assets must be income producing. And, you must have no ability to pay monthly.
See some of M&M’s successful CNC cases here.
Partial Payment Installment Agreement (PPIA)
What Is It? The PPIA is sort of a hybrid of the Offer in Compromise and the standard Installment Agreement. It’s a formal monthly payment plan that will not pay off the total tax debt before the Collection Statute Expiration Date (CSED). The taxpayer can’t make a monthly payment large enough to full pay the debt.
How Will It Lower My Total Tax Payment? The PPIA is reviewed every two years by the IRS to see if the taxpayer’s financial situation has improved. If it hasn’t, it is likely the PPIA will be approved for another two years. If the PPIA outlasts the IRS Collection Statute, you will end up paying less than your total back tax liability.
How Do I Get It? The process to secure a PPIA is similar to that of CNC status described above. Prove to the IRS your lack of accessible equity in assets and your inability to pay your tax debt within the IRS Collection Statute and the IRS may approve your PPIA.
See some of M&M’s successful Installment Agreements here.
What Is It? A Voluntary Payment toward an IRS back-tax debt is any payment that is made outside of a formal resolution and of your own accord. Funds received by the IRS from formal Installment Agreements, bank account levies, A/R levies, wage garnishments and other seizures are not considered voluntary.
How Will It Lower My Total Tax Payment? Possibly lowering your total tax payment is just one of the benefits of making Voluntary Payments. Here’s why. The IRS rules state that you’re able to tell them exactly where you would like to apply your Voluntary Payment.
If you owe payroll tax and you send the IRS a Voluntary Payment without telling them where to apply it, the Service will apply it in the best interest of the government. This typically means the payment will be applied to the oldest period with a balance due.
Instead, designate your Voluntary Payment by telling the IRS where to put it. Apply it toward the Trust Fund tax portion of the most recent balance due payroll tax period. This way the personal exposure to the business tax debt is reduced, the business tax debt is reduced, and the penalty assessed against the tax debt and associated interest will likely be reduced as well. It may also reduce the Collection Statute Expiration Date (CSED) by allowing you to quickly eliminate the most recent period, which usually has the latest CSED.
How Do I Get It? Send Voluntary Payments whenever possible to your Revenue Officer or the address on your most recent IRS notice. Don’t wait for the IRS to contact you. But consider the following before sending Voluntary Payments.
- You must write the form number and year (and period) you would like it applied to on the payment, along with your name, taxpayer identification number, address and phone number.
- We recommend sending a letter along with the payment to make sure the IRS knows exactly where you would like the payment applied.
- Only send Voluntary Payments after making your current tax payments. Current tax compliance should be the priority.
- Contact M&M if you aren’t sure how or where to apply your Voluntary Payments. Remember, not all payments to the IRS are equal.
What Is It? Penalty Abatement is the removal of IRS penalties. As you know, the IRS has many different penalties and they can be confusing. If you have a payroll tax debt, the penalties for failing to deposit your business employment tax on time are listed below. You may also have failure to pay and failure to file penalties.
- 2% - Deposits made 1 to 5 days late
- 5% - Deposits made 6 to 15 days late
- 10% - Deposits made 16 days or more late
- 10% - Deposits made to an unauthorized financial institution or payment made directly to IRS or payments made with tax return
- 10% - Amounts subject to electronic deposit requirements but not made using EFTPS
- 15% - Amounts still unpaid more than 10 days after the date of the first IRS notice asking for the tax due OR the day on which you receive notice and demand for immediate payment, whichever is earlier
How Will It Lower My Total Tax Payment? The simple answer is removing penalties reduces your tax debt by the amount of the penalties removed. But, it will also cause the IRS to adjust the interest that has been charged on the penalties. And if you are in a formal Installment Agreement to satisfy your back taxes, successful penalty abatement will reduce the number of months you’ll be required to make the payment.
How Do I Get It? Hire M&M to create and submit your Request for Penalty Abatement. Or, check out Internal Revenue Manual section 20.1. All you need to do is prove the following.
- the circumstances which caused the accrual of the tax were out of your control,
- you did not willfully neglect your tax responsibilities,
- you did take ordinary business care and prudence in addressing the accrual of tax, and
- the conditions surrounding the accrual of the tax fit within the IRS’ Reasonable Cause Criteria for the abatement of penalties
Offer in Compromise (OIC)
What Is It? The OIC is just what it sounds like, an opportunity to settle your tax debt for “pennies on the dollar”, if you qualify. Of course, that could be 99 pennies for each dollar or it could be 1 penny for each dollar. OICs are considered case by case and the IRS doesn’t deal in handshakes. Prepare yourself for a lot of paperwork and prep time. And it’s a lengthy process, taking up to two years or more in some cases. Keep in mind that the OIC is typically easier for an individual to achieve than a business. The OIC can be especially difficult for a business (and owner) with a payroll tax liability.
How Will It Lower My Total Tax Payment? If the IRS settles your OIC for the amount you propose, they will take that amount as full payment for your total tax debt. This IRS program is a blessing for many delinquent taxpayers.
How Do I Get It? The OIC is an arduous process. You must prove a lack of equity in assets and prove inability to pay your tax debt by the Collection Statute Expiration Date (CSED). The IRS also takes other factors into consideration such as the taxpayer’s age, health, education, work history, income history, among other items.
See some of M&M’s successful OICs here.
Contact M&M today to find out if how we can help you resolve your tax debt for good. You’ll be glad you did. We’ll outline the strategy for resolution with a flat fee quote. You decide if M&M is the right fit for you. No high-pressure sales. Just Straight Talk, Real Solutions.