From the November 1999 issue of Entrepreneur

If the "new and improved" IRS doesn't impress you much, take another look. Changes are taking place that are designed to make it easier to pay the taxes you owe.

The IRS still expects all taxpayers to pay their taxes on time each year, and it still charges interest and penalties if you fail to do so. Nothing new there. But if you find yourself in a real financial bind, there are a few payment options that have recently been changed a bit to make them more customer-friendly.

In fact, the IRS, feeling pressure from lawmakers to be nicer to taxpayers, is reportedly going a bit easier on the collection of unpaid taxes. Take a look at recent IRS statistics: In the nine-month period ending July 31, 1999, the IRS seized property to satisfy overdue taxes only 180 times, down from 2,193 seizures in a comparable period one year earlier. Garnishments of paychecks and levies of bank accounts in the later nine-month period fell to 488,834, down from 2.8 million one year earlier. Liens, which are what the IRS claims against property, went from 331,843 in the previous nine-month period to 143,747.

A recent check with a number of tax collectors around the country by The New York Times attributes these declines in part to a provision in the IRS Restructuring and Reform Act of 1998 that says IRS workers will be fired if they willfully abuse taxpayers or violate their rights. These unnamed tax collectors say they have become less aggressive in collecting unpaid taxes because they fear losing their jobs due to the new law's restrictions.

Another contributing factor, according to analysts, is the fact that the IRS has shifted large numbers of employees from enforcement activity to taxpayer assistance. Many are in the midst of time-consuming computer training designed to help them do their jobs more effectively, says Elliott H. Kajan, a principal with Beverly Hills, California, law firm Kajan Mather and Barish. Kajan specializes in tax-controversy matters.

IRS commissioner Charles Rossotti responded to the news reports of less aggressive tax-collecting this way: "There is nothing about the Restructuring and Reform Act or the IRS mission statement called for by this act that implies less effective tax collection." In fact, he says the tax agency intends "to achieve better compliance with the tax law by concentrating enforcement resources more effectively on the small minority of taxpayers who do not comply."


Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.

Expanding Rights

For those with valid tax disputes, recent changes in the law should make a difference. For example, taxpayers now have the right to collection due process if they face an enforced collection action by the IRS. Specifically, if taxpayers don't believe they owe the tax assessed, they can now request an administrative hearing before an impartial appeals officer within 30 days either after a lien notice is filed or after they receive notice from the IRS indicating it intends to place a levy on their assets.

If the taxpayer requests a hearing, the proposed levy can't take place until the appeals officer has reviewed the case. Once a decision is made, the taxpayer has 30 days to decide whether to challenge the finding of the appeals officer in U.S. Tax Court or U.S. District Court. During this time, the IRS can't seize the taxpayer's property. As a result, "taxpayers can put a collection freeze on their accounts while they are pursuing their due-process appeals rights," says Kajan.

New And Improved Installment Plan

You can also ask the IRS to consider collection alternatives, such as setting up an installment agreement that allows you to pay an overdue tax bill over a number of months or even years. The new law makes working out installment agreements a bit easier than in the past. For example, the new law indicates that taxpayers have "guaranteed access to installment-payment agreements" if they owe $10,000 or less in income taxes and have filed tax returns on time in the past. The threshold limits for these agreements can be even higher depending on the IRS office location, says Kajan. In some areas of California, for example, the limit is $25,000.

This is a big improvement over the way things were done in the past, says Kajan. Changes in the rules for installment agreements make it possible for taxpayers "to handle their own problems with the IRS, without going to practitioners such as CPAs and tax attorneys," he explains.

Once you enter into an installment agreement with the tax agency, other IRS enforcement actions, such as levies or seizures, are suspended. To apply for an agreement, the IRS requires you to complete Form 9465 and pay a $43 fee to get the process started. In addition, you are subject to an interest charge and a late penalty on any unpaid tax. The late fee is one-half of 1 percent to 1 percent of the tax not paid for each month it goes unpaid. This fee is scheduled to drop next year. The maximum late fee, which will not change, is 25 percent of the taxes owed.

Once you've worked out an agreement, you're required to make your monthly payments on time and meet future tax liabilities. If you miss a payment or have outstanding past-due taxes in a future year, you will be in default on your agreement and the IRS may take enforcement actions to collect the entire amount owed.

Paying Less Than You Owe

What if you have a substantial tax bill and simply don't have the financial resources to pay it, even with the help of an installment agreement? In that case, there's another payment option available, known as the "offer in compromise" (OIC) program. This was recently liberalized to make it more accessible to taxpayers.

With the OIC, the IRS agrees to accept less than the full amount of outstanding taxes, interest and penalties if it's confident it will never be able to collect the taxes actually owed. In addition, under new temporary regulations, the IRS will, for the first time, be allowed to consider economic-hardship factors in cases where taxpayers try to settle unpaid tax debts through the OIC. While the IRS is considering whether to accept taxpayers' applications for the OIC, it withholds collection activities.

In the past, only a relatively small number of OICs were accepted. In fiscal year 1998, only 25,052 offers out of 105,255 were approved by the IRS, leading to the collection of $290 million out of $1.9 billion in taxes owed.

The IRS contends it will now be easier for taxpayers to apply and qualify for the program. "Instead of collecting nothing from people with unpaid tax bills, we're able to collect something,' Rossotti said when he recently announced the changes. The aim is to bring recalcitrant taxpayers back into the tax system.

Rossotti also expects fewer rejections of compromise offers, which will result in the collection of more unpaid taxes. Some of the changes in the OIC program include the fact that taxpayers won't be asked to provide as many financial documents to qualify for smaller compromise offers as they were before.

In addition, the IRS has given its employees more freedom to determine taxpayers' financial hardship beyond the standard cost-of-living formulas. As a result, taxpayers will now be able to afford their basic living expenses in addition to paying their tax bills.

While these changes appear to be beneficial, they have yet to be implemented with business clients, says Carol Mount, a tax supervisor for the Alexandria, Virginia, accounting firm of Halt, Thrasher & Buzas.

Kajan agrees that the OIC program remains a difficult payment option to nail down for business owners. "If the IRS goes along with one for a business, it will want at least the full amount of taxes owed to be paid. However, it may waive the penalties and interest," he explains.

Nevertheless, the IRS contends that all these changes are designed to make paying the IRS easier for taxpayers. A revamped agency with a new attitude is also expected to make a difference. If business owners and individual taxpayers promptly receive attention from the agency when problems arise, they will be more likely to comply with the tax code, reducing the need for enforcement action, the IRS contends.

In the meantime, if you have a dispute or can't pay what you owe, the tax agency stands ready to help. Says Rossotti, "If taxpayers are having problems with their bills, we want to work with them to make this process as painless as possible."

More Ways To Pay

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If you like the convenience of paying for purchases with your credit or debit card, the IRS hopes you will enjoy a similar convenience when it comes to paying taxes.

For the 2000 tax-filing season, taxpayers who file their taxes electronically can pay any balance due with a credit card or direct debit from their checking or savings account. In addition, if you have a balance due, you can electronically file in January, receive confirmation of the filing, and then delay actual payment until April 15.

Starting in March 2000, the IRS also plans to expand its electronic-payment program to accept estimated tax payments by credit card to taxpayers using its pay-by-phone option.

Contact Sources

IRS, (800) 829-1040, http://www.irs.gov

Kajan Mather and Barish, (310) 278-6080, http://www.taxdisputes.com