Larry Hess CPA
When you cannot pay your federal tax debt in full within 180 days after the date of the first billing notice, you may qualify for an installment agreement or other options for resolving your debt.
Short-term payment plan
To qualify, you must owe less than $100,000 including tax, penalties and interest and pay the total within 180 days.
There are two variations of installment agreements that do not require you to give the IRS financial information:
If the total of all taxes you owe is $10,000 or less you will automatically qualify for a 36-month installment plan.
If the debt is $50,000 or less you will qualify for an installment agreement with payments of an amount that is the greater of your debt spread over 72 months or the amount that will pay in full your debt by the expiration of the 10-year statute of limitations for collections. Note: This options requires that your payments be made by direct debit to your bank account.
Financial information is required if you owe more than $50,000, so they can determine the acceptable (to them!) monthly payment amount. They determine this amount with an analysis and documentation of (1) the equity in your assets plus (2) your income minus (3) your allowable living expenses and certain other expenses.
Partial pay installment agreement. The IRS has the discretion to approve a monthly payment that will not pay off your debt within 72 months and before the 10-year collection statute of limitations expires. That's called a partial pay installment agreement. This arrangement is subject to periodic review to determine whether you might be able to make a larger monthly payment.
Currently not collectible status
Expenses exceed income. If the total of your allowable expenses is more than your income plus equity in your assets, the IRS can classify your account as currently not collectible. The debt is not written off; but, they suspend their collection efforts and will not expect you to make payments.
Important: This status is temporary. It will be reviewed periodically and the IRS can resume collection efforts they believe you have an increased ability to make payments.
Offer in compromise
An offer in compromise (referred to as an offer or OIC) is an agreement between the taxpayer and the IRS to settle a federal tax debt for less than the full amount owed. The offer amount (called the reasonable collection potential) is the amount the IRS determines you are able to pay based on specific rules. The rules combine the equity you have in your assets, valued at 80% of fair market value, plus a multiple of your excess monthly income as explained above. You can get an idea of whether you might qualify using the IRS Offer in Compromise Pre-Qualifier Tool.
Important. You should not expect the offer in compromise process to be a negotiation. You should also be aware that once you have an agreement, it will be rescinded if you don't comply with certain requirements, such as filing returns on time for up to 5 years and paying the additional tax.