When the IRS says taxpayers owe money

When the IRS says taxpayers owe money
What are the options when taxpayers owe the IRS money? Offers in compromise, installment
agreements, and changing to uncollectible status could help.
By: Carl Breedlove / September 16, 2019
Every year, thousands of taxpayers receive notices from the IRS saying they didn’t pay enough federal
income taxes or that their return is under audit. Taxpayers who owe the IRS money they can’t pay could
panic as they try to come up with what they owe to avoid even harsher penalties, refund offset and credit
issues.
Fear not, taxpayers! The IRS provides several ways to minimize or eliminate an assessment with certain
requirements, including installment agreements, offers in compromise and changing an account to
“currently not collectible status.”
Installment agreements are usually accepted and don’t require a
lump-sum payment
Installment agreements are the most widely used taxpayer remedy because they are a way for the IRS to
collect the entire liability and the taxpayer isn’t required to make a lump-sum payment. Taxpayers can
request an installment agreement online, under certain circumstances, or they can mail Form 9465,
Installment Agreement Request.

To submit a request online, taxpayers must complete an Online Payment Agreement (OPA). For
individuals, the total tax liability, penalties and interest must be $50,000 or less. If the total liability is
greater than $50,000, the taxpayer must mail Form 9465 along with a completed Form 433-F, Collection
Information Statement, that lays out the taxpayer’s nancial situation. If a taxpayer does not abide by the
installment agreement, the IRS will consider it a default on the installment agreement and may revoke it.
Once a taxpayer defaults on the installment agreement, the IRS will send a CP523 Notice giving the
taxpayer a chance to make any payments and contact the IRS before a specied termination date. If the
taxpayer ignores the notice, the IRS will terminate the installment agreement, and the IRS will proceed
with collection actions such as levying wages and bank accounts.
Streamlined agreements don’t require nancial statements and are generally approved
faster than others
Streamlined agreements don’t require nancial statements or managerial approval which means they
tend to get approved faster. The payment duration of a streamlined agreement cannot exceed 72 months
(six years) or they must be completed prior to the collection statute of limitations expiration date
(normally 10 years from the assessment date), whichever is earlier. To qualify, taxpayers must owe
$50,000 or less, but they can pay down their liability and then qualify. If the taxpayer owes between
$25,001 and $50,000 they must enroll in either a direct debit installment agreement or a payroll deduction
agreement (Form 2159, Payroll Deduction Agreement) and some nancial information may be required.
Example 1: John owes $20,000 in back taxes. He has a good job and the ability to pay off the debt
over time. John les Form 9465 requesting an agreement that allows him to pay $278 per month
until the debt is paid off. This agreement will likely be accepted because his monthly payment is
large enough to pay off the debt within the 72-month time-period. If John had asked to make
payments of only $200 the agreement likely would not be accepted because it would take 100
months to eliminate the debt.
Guaranteed agreements are automatically approved if certain requirements are met
An installment agreement is automatically approved when:
1. The amount of the tax (excluding interest, penalties, additions to the tax, and additional amounts)
does not exceed $10,000;
2. The taxpayer has led all previous tax returns and paid any tax required (other than for the year an
installment is requested), and hasn’t entered into an installment agreement for the last ve years;
3. The IRS determines that the taxpayer is nancially unable to pay the tax in full based upon
information provided by the taxpayer;
4. The agreement will result in full payment of the tax within 36 months (three years); and
5. The taxpayer agrees to le and pay all tax returns during the term of the agreement.
Guaranteed agreements allow taxpayers some certainty that an agreement will be approved, if they meet
all the requirements. Note that the dollar limit for guaranteed agreements of $10,000 only applies to tax,
not to penalties, interest, etc.

Although installment agreements are the most common remedy used, sometimes taxpayers cannot
afford to pay the debt in full. That’s where offers in compromise and changing an account to not
collectible status come in.
Offers in compromise settle tax liabilities for less than the full
amount owed
In situations where an installment agreement is too onerous for a taxpayer to pay, an offer in compromise
(OIC) may be the best option. An OIC is an agreement between a taxpayer and the IRS that settles a tax
liability for less than the full amount owed. The IRS will evaluate the taxpayer’s specic situation based on
all the facts and circumstances in relation to income, expenses and whether the taxpayer owns any
assets. The IRS will authorize an OIC in three cases, when there is a:
1. Doubt as to liability
2. Doubt as to collectability
3. Question of effective tax administration
Doubt as to liability only occurs when the IRS and taxpayer legitimately doubt the
validity of a tax debt
Doubt as to liability exists when there is a dispute as to whether the tax liability is actually correct under
the law. The taxpayer must provide a written statement explaining why the tax debt or portion of the debt
is incorrect along with supporting documentation to identity the reasons the taxpayer doubts the
accuracy of the tax debt. Essentially, the taxpayer is saying that they have a genuine dispute about
whether they actually owe the taxes and following the normal procedures to resolve the dispute are not
feasible.
Doubt as to liability is rarely approved because the IRS does not consider this a substitute for the normal
procedures to determine a liability. Grounds for a compromise might exist if the IRS and taxpayer
legitimately doubt the validity of a tax debt. Doubt as to liability cannot be claimed if a court has made a
nal determination of liability.
See the IRS Form 656-L, Offer in Compromise (Doubt as to Liability), for more information.
Doubt as to collectability balances feasibility of payment while paying basic living
expenses
This is, by far, the most common reason OICs are accepted by the IRS. The IRS will determine the
“reasonable collection potential” of the tax debt which balances the amount the taxpayer can feasibly pay
while still paying their basic living expenses. Taxpayers use national and local guidelines, published
annually, when determining their living expenses. To make this determination the taxpayer must le Form
433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, in
conjunction with Form 656, Offer in Compromise. Typically, a taxpayer must make an offer equal to the
full amount that could be collected from the taxpayer’s future income and assets, but special
circumstances may exist to allow for a lesser amount.

Example 2: Continuing the above example, John lost his job and now cannot afford to make
monthly payments, but he does have two cars that he no longer drives daily. The cars have a
combined value of $18,000. John decides to sell the cars and make an offer to the IRS to pay the
$18,000 he receives from selling the cars at auction. This agreement has a good chance of being
accepted, if the IRS determines John’s future earning potential and other assets create doubt as to
collectability. If accepted, John would be relieved of the debt owed without having to make a longterm
commitment—unlike an installment agreement. If John got a new job making roughly the
same amount as the position in Example 1, the offer would likely be rejected because there would
be no doubt as to collectability since he could make payments.
Effective tax administration (ETA) can help taxpayers who can’t afford to pay due to
economic hardship or when equitable considerations are present
This type of offer in compromise can be similar to doubt as to collectability in that one of the acceptable
reasons is that a taxpayer may have sucient income or assets to pay their liability but paying would
create an economic hardship. This occurs where the taxpayer may not be able to earn a living going
forward due to long-term illness and selling all their assets would make them unable to pay living
expenses, or the taxpayer cannot use their assets as security to acquire funds and seizing the assets
would have adverse consequences.
Another acceptable reason for accepting an OIC based on ETA occurs when the taxpayer can
demonstrate a compelling public policy or equitable considerations against collecting the full liability. The
taxpayer must demonstrate that collection of the full liability would undermine public condence that the
tax laws are not being administered in a fair and equitable manner.
The IRS has accepted offers based on the following situations:
• The liability was directly caused by a processing error by the IRS;
• The taxpayer incurred the liability due to erroneous advice or instructions by the IRS;
• Action or inaction by the IRS unreasonably delayed resolution of the taxpayer's case and interest or
penalty abatement is not available;
• The criminal or fraudulent act of a third party is directly responsible for the liability;
• Pursuing collection of the liability would have a signicant negative impact on the community
where the taxpayer lives or does business; and
• The taxpayer was incapacitated and unable to comply with the tax laws.
Taxpayers may submit an offer based on doubt as to collectability and ETA on the same Form 656,
allowing the IRS to determine if either reason is grounds to accept the offer. Taxpayers may not include
doubt as to liability and doubt as to collectability on the same form.
Currently Not Collectible status allows taxpayers to pause
collection
If a taxpayer cannot pay an assessment due to a nancial hardship, he or she may have the option to
place their account in Currently Not Collectible (CNC) status. Other situations may also allow for CNC

status. If a taxpayer qualies, all collection activities by the IRS, such as levying the taxpayer’s income,
will be suspended and no payments are due.
Typically, the IRS will exhaust all available methods to collect a past due tax liability before deeming the
account uncollectible. In this situation, a nancial hardship occurs when collecting the liability would
create an undue hardship for the taxpayer by leaving them unable to pay their necessary living expenses.
The taxpayer must le a Form 433-A, Collection Information Statement for Wage Earners and Self-
Employed Individuals, to demonstrate a nancial hardship, and this form is valid for a period of less than
12 months. This form provides the IRS with the taxpayer’s employment status, whether the taxpayer has
liquid assets or real property, and the taxpayer’s monthly income and expense statement. In addition, the
taxpayer must le delinquent returns and satisfy any other requests made by the IRS to qualify for CNC
status.
Unlike the other remedies discussed, CNC status does not resolve the taxpayer’s case because it will
remain open for the remainder of the statute of limitations for collections (typically 10 years from the
assessment date). This means that penalties and interest still accrue, and the IRS may apply any future
refund to the debt owed. Lastly, the IRS will review the taxpayer’s income annually to ensure the nancial
hardship still exists. These additional considerations mean taxpayers should evaluate if any other remedy
exists before attempting CNC status.
Example 3: John hasn’t had a job in over ve years, and he has no major assets. After the IRS goes
through all the normal collection methods, John requests that his account be granted CNC status.
Here, there is a good chance his request would be accepted because there is not an avenue at this
time for the IRS to collect the debt. If after two years John gets a job, and the statute of limitations
has not run out, John will likely lose CNC status and be required to pay the debt.
No matter why taxpayers owe back taxes, they should respond when they receive a notice from the IRS
and set up an appointment with one of our experts to see if any of these remedies can help.
Carl Breedlove
Carl Breedlove is a tax research analyst at The Tax Institute. Carl works with
a research team focused on tax law and policy, including analysis of the Tax
Cuts & Jobs Act, state law updates and IRS materials.