It happens every now and then: A financial bump in the road causes you to fall behind in your federal tax payments. Sales may take a sudden downturn or a serious illness strikes, and you put your tax bill on a back burner.
Don't despair. There are ways to get back into the government's good graces. The IRS offers several payment plans; the condition of your balance sheet and your current income stream dictate which one is for you.
While the IRS expects you to pay your taxes on time each year, it is ready to work with business owners who find themselves in financial hot water. Becoming a delinquent taxpayer comes with some unpleasant consequences. You must pay not only the taxes owed but also interest and penalties, which continue to accrue until you settle with the IRS.
Beyond the mounting tax bill, the collection process can get ugly. "Revenue agents can put padlocks on your business and shut you down if you don't take the necessary steps to pay the IRS," says CPA Steve Halt with the Alexandria, Virginia, accounting firm Halt, Thrasher & Buzas.
There are essentially two payment options available if you're in a bind. The first one is the installment plan, which lets you pay a designated amount on a regular basis until taxes, penalties and interest are completely paid off. To apply, send in Form 9465, the Installment Agreement Request, and propose a payment plan. If you owe less than $10,000, a detailed financial statement is not required.
Use of the installment plan is on the rise. The IRS reports that the number of taxpayers using the installment payment plan has more than doubled in recent years, increasing from 1.1 million in 1991 to 2.6 million in 1996.
The second payment option, the "offer in compromise" (OIC) program, is also seeing greater use lately as the IRS attempts to collect some of the existing $100 billion in unpaid taxes. OIC gives taxpayers in serious financial trouble an opportunity to settle their tax bill by paying less than they actually owe.
Mapping it out
If you're facing a tax payment hurdle, contact the IRS as soon as possible. "Don't waste time by thinking your tax problem will go away because it won't," warns Halt. If you ignore the problem, the IRS will begin sending you collection letters, and these can be intimidating, he adds.
The IRS also has the authority to take enforcement action against you. In addition to closing down your business, the agency can file a lien against your assets, seize bank accounts or sell your property.
To see if you qualify for an OIC, you will need to fill out Form 433-B, Collection Information Statement for Business, along with OIC Form 656. Individuals and sole proprietors need to complete Form 433-A, Collection Information Statement for Individuals, instead of Form 433-B. These forms provide the IRS with comprehensive financial information about your assets, liabilities and income. You can request the forms by calling (800) 829-1040.
The 656 form was recently revised to cut down on the number of OIC forms the IRS was unable to process due to incomplete information, according to an IRS official. The IRS discovered that taxpayers weren't supplying all the necessary financial information, and that the taxpayers' offers didn't reflect all their equity and assets, he says. The revised form specifically states that a revenue officer will review your offer package to be sure you accurately included information regarding all your assets and income. If you submit incomplete financial information, the entire package will be returned to you.
When submitting your offer package, you must also indicate the total amount of taxes you believe you can pay. The IRS will then determine whether you qualify for an OIC.
The IRS is giving OICs more serious consideration now because it has found that installment agreements don't always produce the desired results. In some cases, the amount of accruing interest and penalties on outstanding taxes is so great that regular payments don't begin to adequately chip away at the principal. In others, the taxpayer doesn't have much in the way of assets. Says Halt, "The taxpayer may have cashed in all retirement funds, borrowed all the equity in his home, and simply lacks the income stream to pay back the IRS."
Means to an end
The IRS agrees to accept less than the full amount of outstanding taxes, interest and penalties when it is confident it will never be able to collect the taxes you actually owe, says attorney Elliott H. Kajan, a principal with the Beverly Hills, California, law firm Kajan Mather and Barish, who has helped negotiate a number of OICs.
The goal of an OIC is to reach a compromise that's in the best interest of both the taxpayer and the government, says an IRS official. "If we can collect more [funds] through other means, we would have to explore those other means of collection," he says. If the IRS finds, for example, that it can collect the entire amount you owe through liquidation of your assets or from future earnings, it will pursue those options instead of agreeing to an OIC.
A taxpayer's financial problems have to be fairly serious for an OIC to be accepted. Kajan likens it to a bankruptcy procedure. "The taxpayer must be so far in over his or her head with taxes that there is no way he or she will be able to crawl out of that hole," says Kajan, "so the IRS says `Let's give them an economic fresh start with the OIC program.' " One of Kajan's clients, for example, had a $15 million tax obligation but was able to pay only $900,000, which the IRS accepted as full payment under the OIC program.
To determine exactly how much it will accept in compromise, the IRS considers the total value of the equity you have in all assets as well as your future earnings potential. For example, if a taxpayer owes the IRS $38,000, and the IRS determines that liquidating his or her assets would only raise $5,000 and that the discounted value of future collectible income for a five-year term would only total $7,000, the taxpayer's offer to immediately pay $12,000 borrowed from a relative stands a good chance of being accepted.
Working out an offer can be a lot like playing tug of war. "The taxpayer wants to pay the least amount possible, and the IRS wants the most amount paid," says Kajan. It may be wise to hire an attorney or accountant to help you complete the forms and successfully negotiate an offer.
The IRS also encourages you to include a deposit when seeking an OIC. It believes this action reflects your good faith effort to reach a compromise. The deposit goes into a noninterest-earning fund until the IRS makes its determination on your case.
In the end, an OIC can be a win-win situation. The program gives taxpayers a new start, and the IRS gets a chance to collect some money when a tax bill far exceeds the amount a taxpayer is ever able to pay. According to IRS statistics, it accepted a record 27,673 OIC offers in 1996, a 48 percent acceptance rate. These offers totaled $287 million and settled outstanding tax debts of $2.17 billion. So far this year, 19,869 offers have been accepted, a 47 percent acceptance rate. To date, the 1997 offers represent $228 million and settle debts of $1.5 billion, says an IRS official.
Playing by the rules
Keep in mind that the IRS will not agree to an installment agreement or an OIC offer if you are delinquent on your current tax year's liability. You will not be allowed to pay off an old obligation and create a new one in its place, says Halt. In addition, the IRS requires that you comply with all tax filing and payment requirements for five years after an OIC is accepted. If you don't file all returns and pay all the taxes you owe over this time period, the IRS can default on the OIC, and the collection enforcement procedures will begin again.
Getting IRS approval for an offer requires a good deal of documentation and often a long wait. Even so, if you can work out a compromise that essentially lets you pay less than you owe, the time and effort will be well spent.
Don't think that an offer will automatically stop IRS collection proceedings, however. If you filed for an OIC simply to delay collection of the tax, the tax agency will keep its collection notices coming. If you have an installment agreement in place before submitting a compromise offer, you must continue those payments while your offer is being considered.
Making amends with the IRS can be difficult, but it's not impossible. The key is to develop--and implement--a realistic plan. Says Halt, "Take a proactive stance, and don't bury your head in the sand when it comes to an outstanding tax bill."
Halt, Thrasher & Buzas, 99 Canal Ctr. Plaza, #230, Alexandria, VA 22314, (703) 836-1350
Kajan Mather and Barish, 9777 Wilshire Blvd., #805, Beverly Hills, CA 90212, (310) 278-6080
Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 11 years.