Many taxpayers face hardship every day. One of them may be an inability to pay income taxes owed to the Internal Revenue Service (IRS).
This often results from a self-employed taxpayer who does not make the required estimated tax payments or from a W-2 employee who does not have enough income taxes withheld from their paychecks. Potential negative consequences when income taxes are due to the IRS and the taxpayer is unable to pay the obligation include a tax lien or levy.
Many taxpayers face hardship every day. One of them may be an inability to pay income taxes owed to the Internal Revenue Service (IRS).
This often results from a self-employed taxpayer who does not make the required estimated tax payments or from a W-2 employee who does not have enough income taxes withheld from their paychecks. Potential negative consequences when income taxes are due to the IRS and the taxpayer is unable to pay the obligation include a tax lien or levy.
A Federal tax lien is a legal claim against a taxpayer’s current and future property such as a house, car, or bank accounts.1
A levy is a legal seizure of property such as a seizure of a bank account, social security payments, or wage garnishment.1 Seizures may occur because the taxpayer did not pay the income taxes due and a Final Notice of Intent to Levy and Notice of Your Right to Hearing was sent to the taxpayer at least 30 days before the seizure. There are some exceptions to the 30 day notice before property may be seized. Examples of exceptions include collection of tax is in jeopardy or a levy is issued to collect a state income tax refund. Banks will normally remit payment to the IRS 21 days after the bank levy was issued. The levy on wages will continue until the tax debt is paid in full, or arrangements are made.
Then, what are the arrangements that may be made to remove the levy on wages and prevent future wage garnishments and seizures of property such as seizures of bank accounts? Options include the taxpayer entering into a monthly installment agreement, currently non-collectible status, or an offer in compromise.
An installment agreement means that the taxpayer will make monthly payments to the IRS based on a taxpayer’s ability to pay. Taxpayers who owe $50,000 or less may be eligible for a streamlined process. This means that full financial disclosure may not be necessary if the taxpayer with income tax debt of $50,000 or less can pay off the tax debt with 72 months. If the taxpayer cannot pay the tax debt within 72 months or has a tax liability greater than $50,000, full financial disclosure may be necessary. Full financial disclosure includes a listing of a taxpayer’s assets, liabilities, income, and expenses. This disclosure is necessary to determine a taxpayer’s ability to make monthly payments.
What does a currently non collectible status mean and how does a taxpayer qualify for such a status? A currently non collectible status means that the IRS will temporarily cease collection action such as a seizure of a bank account or garnishment of wages. If the financial disclosure indicates that a taxpayer is experiencing financial hardship and the taxpayer’s income or cash flow does not exceed a taxpayer’s reasonable and necessary expenses, then the taxpayer may qualify for a currently non collectible status. A taxpayer should keep in mind that this is not a permanent status. The IRS may request updated financial information periodically to determine if the taxpayer is still eligible for the currently non collectible status. In addition, interest and penalties will continue to accrue until the tax debt is paid in full.
An offer in compromise is a way to settle unpaid taxes for less than the full amount of income taxes owed.1 A taxpayer may qualify for an offer in compromise if he or she does not have the ability to pay the taxes due in full through an installment agreement and has insufficient assets to pay the taxes due in full. The taxpayer should be current on their income tax filings and current on making the required estimated tax payments before an application for an offer in compromise is submitted. An application fee and an initial down payment amount should be submitted with the application unless the taxpayer qualifies under the low income certification guidelines. The application fee and down payment are not refundable. It should be noted that filing an offer in compromise application does not guarantee acceptance.
A taxpayer has several remedies when income taxes are owed and the taxpayer cannot immediately pay the obligation in full. The most appropriate remedy should be selected based on the taxpayer’s financial condition. Taxpayers should not ignore IRS notices as negative consequences may result from inaction.
1Internal Revenue Service Publication 594
Stanley Hong is a Certified Public Accountant and an accounting professor at the Long Beach campus of DeVry University.
