CHAPTER 9: TAX RESOLUTION OPTIONS
Now that we have gone through the financial analysis, we are ready to talk about tax resolution options. When you are trying to resolve tax matters, you have a few different options. We will go through each one of these together.
Option 1 – Full Pay the Tax Owed
While seldom a popular option, it is still an option! If you can do a one-off payment and full pay the tax debt, you can choose to do so. If you provide financial analysis and the IRS finds that you can full pay (or receive financing help to do so), it is likely they will force you to do so anyways.
There could be some prudence to just paying it yourself before you go through this entire process. If you do not have the option to full pay, there are other options at your disposal next.
Option 2 – Filing Unfiled Tax Returns and Replacing Substitute for Returns
When resolving a tax problem, it is relatively common to have unfiled back tax returns filed on your behalf by the IRS. This is called a Substitute for Return (SFR). Just like it sounds, the IRS is substituting the return you should have filed, for a return of their own.
When the IRS goes through this process, they will use information they have on the account to file a return on behalf of the business. This tax return will assume the worst-case scenario and will not include deductions, exemptions, credits, and so forth that the business might have been eligible for had the business filed themselves.
The reason this is a resolution option for you, is because after you pull your account transcripts, you may find that replacing a Substitute for Return with an actual filed return may legitimately reduce the tax liability or even remove it altogether. You may still have penalties and taxes regarding not filing, but it will likely be less than the amount the IRS was barking up your door for.
At that point, you can full pay (option 1) or go through additional tax resolution pathways as needed or applicable.
Option 3 – Installment Agreements
Roughly 75% of all business tax debtors will be placed on an installment agreement. This is the predominant resolution pathway, not the OIC or CNC program.
I recognize that might be shocking in a way, given that so many companies out there have “Pennies on the Dollar” advertising which means the Offer in Compromise program. Only 1/3 of 1% qualify on the 1040-individual side, and even less qualify on the business side.
Most IRS tax debt cases are resolved through an appropriate payment plan. With tax debts, this equates to a few different Installment Agreements.
Before we jump into each of these, I want to point out that besides making installment payments on time, the terms of an Installment Agreement will always dictate that you file all tax returns on time and that you make any other required tax payments due during the life of the agreement on time as well.
Those payments include Federal Tax Deposits for payroll taxes moving forward. Failure to make an FTD can void the Installment Agreement in its entirety, so it is incredibly important to stay current and compliant with filings and payments.
Let us review each of the installment agreement options:
1. In-Business Trust Fund Express Installment Agreement (IBTF-E)
Let us start with the express option first.
This is the streamlined option for businesses still in service to pay their payroll taxes. Only employment tax debts (code MFT55 on the account transcripts) can be resolved with this agreement.
It is the best option and really the way to go if you can qualify for this option if you have not let the problem linger for a long time. There are some qualification criteria for this installment agreement, namely:
o You can pay down the total to less than $25,000 before you apply as a voluntary payment and applied to “trust fund only” and to the most recent quarter.
o The pay-down option must be paid before a Revenue Officer is assigned. If a RO gets assigned, they will not allow you to do this.
Let us talk through a few pros of this installment agreement option:
*Special Note: You can often get around the Trust Fund Recovery Penalty within an Express installment agreement. The Trust Fund Recovery Penalty in many situations can entirely be avoided. For this to happen, the business must meet all the IBTF-E requirements above, the debt can only include current or prior calendar year quarters, and they can’t have already initiated a 4180-interview process (the Trust Fund interview) prior to agreeing to the IBTF-E installment agreement. It is a timing issue, but if you are eligible make sure to take full advantage.
2. In-Business Trust Fund Installment Agreement
This is the non-express version. In effect, it is the full installment agreement when businesses are in service and they do not qualify for the Express option. They typically have tax debts in excess of $25,000 or they cannot pay it all down in 24-month payment terms.
Again, only payroll tax debt can be paid down through this agreement, but there is absolutely no cap on the amount of debt. Business income tax, excise tax, etc. must be resolved separately and you likely will end up on two separate installment agreements.
The downsides to this installment agreement, compared to the Express option are:
The In-Business Trust Fund Agreement is a big whammy for the Trust Fund Recovery Penalty, which almost always will be assessed.
If you find yourself in these situations, one of three situations will typically happen:
3. Streamlined Installment Agreement
This is an option with a limitation on the amount, but only if the business is closed or closing, so I will not be spending time on it in this book. The streamlined agreement is still in the businesses name and EIN, but the owner is really paying at the end of the day.
4. Regular Installment Agreement
This too is an option, with no limitations on amount but only if the business is closed or closing like the streamlined agreement.
5. Partial Payment Installment Agreement
This is an agreement that allows the business to pay something to the IRS. In other words, they know they cannot get the full amount, but they still require the business to pay something.
This can include any amount while they are in business. You will be required to provide full financials and the CSED will be extended. If you qualify for this option, it is often worth considering the offer in compromise program instead of the partial payment installment agreement.
Pending Installment Agreements
Once you have decided on the agreement that you fit in with, you need to get ready by being current and compliant by submitting all 941 returns (not just some of them) and by making your regular deposits like a good taxpayer.
From there, you can request an installment agreement by mail, fax, and voicemail (I prefer to do it all three ways). You need to specifically request the installment agreement type, include all tax types and periods, and be ready to provide necessary financials.
Option 4 – Currently Not Collectible Status
After doing your financial analysis, you may be reporting to the IRS that you have no assets by which they can liquidate and no income that is above and beyond business expenses that can pay for the debt.
At that point, you could qualify for CNC status.
If you are placed in currently not collectible status, the CSED does not get stopped. The idea with CNC is that the Collection Statute Expiration Date (the last date for the IRS to collect from you) expires while under this status. When that occurs, the liability disappears, and the business will not owe a dime to the IRS.
That sounds amazing, right? Often it is and may even be a better deal than an offer in compromise. However, there are a few tradeoffs, namely that the IRS will file a tax lien against the business, there will be a mandatory financial analysis follow up every 18-24 months, and the Trust Fund Recovery Penalty assessment will be filed against someone (or multiple people). Those are the trade-offs in place here for not needing to pay anything.
To qualify for this status, you must:
In other words, you are basically broke; hence the not collectible.
After being placed in this status, a failure to maintain Federal Tax Deposits or future filing compliance will result in reactivation.
Option 5 – The Offer in Compromise
Whenever you see advertising with the phrase “pennies on the dollar” on it, it is referring to an Offer in Compromise. It is possible for operation businesses to compromise their tax debts via the Offer in Compromise pathway. However, many firms advertise this resolution option as the number one option, but most of the business will not qualify for it.
The IRS will only accept this option if it is in the IRS’ best interest to collect the outstanding tax liability.
If you do qualify, there are some amazing benefits, namely:
The downsides though are:
Your eligibility to settle for less than what you owe is largely due to a few scenarios:
1. Doubt as to Collectability with Special Circumstances
In this scenario, you will have needed to have economic hardship and be unable to keep the business going in a lot of respects. In this case though, there is still an ability to make an offer based on the Reasonable Collection Potential (RCP)
2. Doubt as to Liability
This means that you have a genuine dispute as to the existence or amount of the correct tax debt under the law.
3. Effective Tax Administration
In this scenario, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. There is no doubt that the tax is owed and that the full amount can be collected, but for all intents and purposes, the collection of that tax would put the IRS in a bad eye with the public.
In other words, they are kicking the business while they are down in a grave enough way that people would hear about it and be disgusted with the IRS for doing so.
If you qualify for OIC, you will need to get a bunch of stuff in order:
Yes, for an Offer to be filed, someone needs to be liable and assessed the Trust Fund Recovery Penalty. The IRS will not even process the Offer unless someone has been assessed this penalty.
The business can file the OIC and pay a fraction of the liability, but the Trust Fund still needs to be addressed and someone will still be on the hook for it.
When submitting an OIC, you need to use Form 656, Offer in Compromise, submit an application fee, and then submit Form 433-B (OIC). Before you do all of that, make sure you are current and compliant, you meet the eligibility and requirements I have detailed above.
From there, the IRS will do a full financial review and request documentation. They will also verify, in depth, your asset and income situation using the following types of helps (and this is just the tip of the iceberg):
In addition to an application fee, you are required to put an initial “deposit” down to start your offer. There are two payment options:
1. Lump Sum
Businesses may choose to pay the offer amount in a lump sum or in installment payments. A "lump sum cash offer" is defined as an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted.
If a taxpayer submits a lump sum cash offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the application fee.
The 20 percent payment is generally nonrefundable, meaning it will not be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the 20 percent payment will be applied to the taxpayer's tax liability. The taxpayer has a right to specify the tax liability to which the IRS will apply the 20 percent payment.
2. Periodic Payment Offer
The "periodic payment offer” is an offer where the business will make 6 or more monthly installments, but within 24 months of when the offer is accepted.
When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment is required in addition to the application fee.
This amount is generally nonrefundable, just like the 20 percent payment required for a lump sum cash offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.
Calculations – Reasonable Collection Potential
When you are putting together your offer, you need to collect your Reasonable Collection Potential (RCP). This is the amount that will help the IRS lean towards going after this deal. They will not get more than this!
This amount cannot be zero, and it will not include amounts that have already been paid.
In short, TCP is the total amount (cannot be zero and will not include amounts that have already been paid towards the liability) that the IRS could collect from you within one to two years. This will include:
The minimum offer amount is the total of everything listed above. If the RCP exceeds the tax liability, you are not an OIC candidate unless exceptional circumstances exist.
After adding up assets, incomes, etc., you’ll take your remaining monthly income and multiply that by either 12 or 24 to get your future remaining income (see Page 5 of Form 433-B (OIC): https://www.irs.gov/pub/irs-pdf/f433boi.pdf).
From there, you will add this amount plus the value of non-income generating assets that have value and you will sell and that becomes your offer amount (which cannot be zero).
If your OIC is rejected, you will be notified by mail. The letter will explain the reason for why the IRS rejected the offer and will also give you a ticket to Appeals. The appeal must be made within 30 days from the date of the letter. Please reference Chapter 5 for information on how to deal with Appeals.
Option 6 – Discharging Taxes in Bankruptcy
Contrary to popular belief, it is possible to discharge tax debts in bankruptcy. You read that correctly. Yes, some federal, state, and local income taxes can be discharged in Chapter 7, Chapter 13, and Chapter 11 bankruptcy.
Better yet, even the penalties and interest that is attached to those income tax debts can also be dischargeable as well. But determining which back taxes are dischargeable is an overly complex process.
I am not a bankruptcy attorney, so I will not be diving deep into this Option. But there are a few core principles that you should be aware of:
Option 7 – Expiration of the Collection Statute
Finally, the last option is the expiration of the collection statute (CSED clock). The IRS only has a limited time during which to collect back taxes from you. This time period starts after an assessment has been made and ends 10 years later.
It should be noted that this CSED clock runs for each period, in this case each quarter. If you want to dive deeper into the CSED clock, please review Chapter 4.
But the expiration of the CSED is an option, because if this clock runs out, then the liability drops off entirely. I have not seen this personally, but other tax professionals have advised certain clients to not do anything with the IRS (sometimes not even bring their tax debt to their attention) because the CSED was about to expire.
If you filed proper returns, an assessment was made, but then collection was never enforced and you are nearing that CSED clock expiring, this is an option for you.