Many taxpayers are struggling to pay their taxes due to the coronavirus (COVID-19) pandemic.
Some 11.23 million Americans owe a total of more than $125 billion in back taxes to the IRS. This number is likely to grow.
During the first wave of the pandemic in March, the IRS implemented the People First Initiative, which put a temporary halt to most collection efforts. The People First Initiative expired on July 15, 2020.
The IRS is gradually ramping up enforcement. It began sending out balance due notices to some taxpayers in late October.3
But the IRS remains aware that substantial numbers of taxpayers cannot pay what they owe right now. To help them, it has promulgated a new Taxpayer Relief Initiative.
The Taxpayer Relief Initiative is far more modest in scope than the People First Initiative. But it still provides valuable help to Americans who owe the IRS back taxes.
Here are two taxpayer rules of the road: First, don’t ever ignore a tax bill from the IRS. And second, never feel you’re helpless when confronted by the IRS collection juggernaut.
You always have options for dealing with a tax bill you unquestionably owe. You can
- pay in full;
- pay in monthly installments, by agreement with the IRS;
- reduce, eliminate, or pay the debt through bankruptcy;
- reduce the debt and pay it through an IRS offer in compromise; or
- have the IRS determine that you are temporarily unable to pay and suspend collection.
The IRS Taxpayer Relief Initiative makes all but the bankruptcy option more taxpayer-friendly.
Payment in Full Extension
If you’re able to pay your tax bill in full in one lump sum, but you need a little extra time, you may obtain an extension of time to pay. You must owe no more than $50,000 ($25,000 for business taxpayers) in combined income tax, penalties, and interest to qualify. You must also have filed all required tax returns.
Ordinarily, the extension is for 120 days. The Taxpayer Relief Initiative extends the time for such short-term payment plans to 180 days. To enter into a short-term payment plan for 180 days, call the IRS at the number on your tax bill. (As of November 30, 2020, the IRS had not updated its online plan for the 180 days, so the phone number is your best bet.)
The IRS will not bill you for a user fee if you pay your tax liability in full within 180 days.
But note that the IRS charges interest and a late payment penalty for each month you carry a tax balance. The initial late payment penalty is 0.05 percent per month, which is reduced to 0.025 percent if you qualify for a payment plan. The interest rate changes quarterly, so figure an additional 3 percent to 4 percent on average if you wait six months to pay what you owe.
If you can’t pay your balance in full within 180 days (or if you don’t qualify for a short-term payment plan), you can enter into an installment agreement with the IRS. An installment agreement enables you to make monthly payments to pay off your tax bill over a much longer time. Again, you’ll have to pay penalties and interest.
There are several types of installment agreements.
Streamlined installment agreement. Streamline installment agreements the easiest type of installment agreements to get and have been available for many years. You qualify for one only if you owe less than $50,000 in taxes, penalties, and interest ($25,000 for business taxpayers). You also must not have owed any tax or had an installment agreement during the past five years. You must agree to pay off your tax bill within 72 months (or, if sooner, before the 10-year statute of limitations on your tax debt expires).
You don’t need to make financial disclosures with your application, and the IRS will not file a tax lien. You can apply
- by calling the number on the IRS bill; or
- by filing IRS Form 9465, Request for Installment Agreement.
If you apply online, streamlined agreements are granted automatically in as little as 30 minutes.
Non-streamlined installment agreement. The Taxpayer Relief Initiative establishes a new, non-streamlined installment agreement for taxpayers who owe $50,000 to $250,000. You must agree to pay all you owe within the 10-year statute of limitations, but you don’t have to complete the lengthy and intrusive IRS Form 433-F, Collection Information Statement. This option is available only if your case has not been assigned to an IRS revenue officer.
Ordinarily, the IRS will file a tax lien on your property when you owe this much money. But if your tax liability is for the tax year 2019 only, you can obtain such an installment agreement without a tax lien.
Planning note. Obtaining an installment agreement for such a large amount without a lien is an enormous benefit. If you qualify, you should take advantage of this offer.
The Taxpayer Relief Initiative also makes life easier for taxpayers who already have installment agreements. Ordinarily, if you miss one or more payments, the IRS will revoke an installment agreement. Now, the IRS will automatically add certain new tax balances to existing installment agreements for individuals and out-of-business taxpayers instead of revoking the agreement.
Finally, the Taxpayer Relief Initiative stresses that installment agreements are not set in stone. You can apply online to change your monthly plan amount or monthly due date. This online option is available only if you have a direct debit installment agreement, and your monthly payments are automatically paid to the IRS from your bank account.9
Offers in Compromise
Taxpayers who can’t afford to pay the IRS the taxes they owe can enter into an offer in compromise (OIC) with the IRS, in which the agency accepts payment of less than the full amount owed.
OICs are not easy to get. You must file a lengthy OIC application disclosing your financial situation and make an OIC. Your OIC must equal your assets’ net realizable value, plus your excess monthly income, after subtracting your monthly expenses. You then make monthly payments for up to two years.
Unfortunately, many taxpayers with accepted OICs fail to make their required payments and end up having their OICs canceled by the IRS. The Taxpayer Relief Initiative provides that the “IRS is offering flexibility for some taxpayers who are temporarily unable to meet the payment terms of an accepted Offer in Compromise.”
The IRS has provided no further details. But if you have an accepted OIC and are unable to make your payments, you should contact the IRS and seek relief.
The IRS may temporarily suspend your payments, temporarily permit you to pay less than the full amount, or even renegotiate the OIC to allow you to make lower payments permanently. Be prepared to show that your ability to pay has been impaired since the IRS accepted your OIC.
Suspending Collection of Your Tax Bill Due to Hardship
In hardship cases, the IRS can temporarily suspend a tax bill collection until your financial condition improves. Your account balance is classified as “currently not collectible,” or CNC.
Generally, you must show you have either no equity in assets or insufficient income to make any payment without causing hardship.
“Hardship” means you’re unable to pay reasonable living expenses.
You may be required to submit one or more collection forms showing your assets, liabilities, income, and expenses.
If CNC status is approved, you shouldn’t hear from the IRS again for six months at least. Nevertheless, interest (and late payment penalties) still accrue.
To request a temporary delay of the collection process or to discuss your other payment options, contact the IRS at 1-800-829-1040 or call the phone number on your bill or notice.
Don’t Forget Penalties and Interest
Almost all tax bills include penalties and interest. But you may be able to avoid paying some or all of these penalties.
The Taxpayer Relief Initiative highlights two ways for you to have penalties reduced or eliminated:
- Reasonable cause. Penalties for failure to file, failure to pay, or failure to deposit taxes can be reduced or eliminated if you have a reasonable cause—for example, illness or inability to obtain records.
- First-time abatement. If you haven’t been assessed an IRS penalty for the prior three years, you could qualify for first-time penalty abatement (FTA). FTA allows you to remove failure-to-file and failure-to-pay penalties for a single tax year, as well as failure-to-deposit penalties for business payroll taxes for one quarter. You don’t have to show the IRS you had reasonable cause for failing to file, nor do you have to pay the penalties.
The IRS is showing a willingness to work with you to resolve tax problems. Although the IRS makes the process accessible to all taxpayers so you can work with the agency on your own, the IRS processes and procedures are complicated and confusing. It takes patience and fortitude to deal with the red tape. Hiring an enrolled agent (see this blog post) to represent you before the IRS and help you navigate the process may be the best way to move forward with these problematic tax issues.