If you owe taxes which you cannot currently pay, you have options for avoiding collection action from taxing authorities. First and foremost is the installment agreement. To enter into an installment agreement with a taxing authority, you must complete a collection information statement, a personal financial statement, and submit it to the taxing authority along with the required supporting documents. The taxing authority will offer you an installment agreement requiring a monthly payment which your collection information agreement indicates you can pay.
“Tax collection action” means, primarily, seizure (“levy”) of your bank account, wages, or other property. Tax collection action can also involve recording a notice of tax lien against you in a public office; this would effectively disable you from selling or mortgaging an interest in real property without resolving the tax lien encumbering the property.
The United States Constitution entitles you to due process of law concerning any tax collection action. Due process of law means (1) notice and (2) an opportunity to be heard by a fair, impartial arbiter. A taxing authority must provide you written notice and an opportunity to be heard before taking collection action against you. You can then request a due process collection hearing concerning the proposed collection action. In the Federal scheme, this means a hearing before the IRS Appeals Office. We successfully resolve most of our tax collection cases with the IRS Collection Division. A case not resolved before the IRS Collection Division proceeds to the IRS Appeals Office, and likely will be resolved there. A case which cannot be resolved in the IRS Appeals Office can be litigated—seldom is that necessary.
If your collection information statement indicates that you cannot afford to pay anything to the taxing authority, then the taxing authority will post your accounts as currently not collectible (“CNC”). This means that you will not have to pay anything on your tax accounts, for the time being at least.
Whether the taxing authority enters into an installment agreement with you or posts your accounts as currently not collectible, the collection statute of limitations will continue running on your tax accounts.
An offer in compromise (“OIC”) is another tool in dealing with tax collection action. In an offer in compromise, the taxpayer offers to pay the taxing authority an amount in excess of the aggregate value of the taxpayer’s assets, as indicated by the taxpayer’s collection information statement, in full compromise and settlement of the taxpayer’s tax balances owing. The taxing authority investigates the offer and, if it determines that the offer is in its best interests, accepts it.
A tax authority will not consider an offer from a taxpayer who has not filed all tax returns that are due.
The requirement that an offer exceeds the aggregate value of the taxpayer’s assets makes an offer impractical for most taxpayers. An offer in compromise is advisable for only those taxpayers with little or no valuable assets. A taxpayer should not make an offer in compromise unless it is likely to be accepted. An offer in compromise suspends the collection statute of limitations for the pendency of the offer. A taxing authority can take a year or more to investigate an offer. A taxpayer incurs substantial professional fees in making an offer in compromise.
For many reasons, bankruptcy is almost never an effective means of dealing with a tax liability.
The tools outlined above can be brought to bear to prevent tax collection from being taken against you. They can also be asserted to terminate tax collection action which has already initiated against you.
There are many accountants and other ill-qualified people anxious to try to handle your tax collection case. Many, perhaps most, of these people only want your retainer, and will not do anything about your tax collection case. Indeed, they are incapable of doing anything about your tax collection case. You need to be represented by competent counsel to prevent or terminate tax collection action against you, and resolve your tax collection case.
Taxpayers should avoid “tax resolution” firms. These firms advertise heavily, preying upon the public. But these operations are unregulated. They employ unqualified workers, often at minimum wage. All these operations want is your retainer. There modus operandi is that they promote their services in states away from where they are located, so that taxpayers taken advantage by them will find pursuing legal action against them uneconomic. These operations come and go. When they have spread to a national presence, they tend to be closed by Federal Trade Commission litigation or class actions prosecuted by consumers.