If you have tax debt and wonder how you’ll manage to pay them in 2021, you’re not alone.
At the end of 2019, there were 25 million taxpayers who also wondered how they’d pay their taxes—even before the pandemic made life more challenging.
On a positive note, the IRS is aware of the situation and has created new procedures to provide relief to taxpayers while helping them meet tax requirements. Here are a few tips:
More Time to Pay 2020 Tax Debt
For taxpayers who can pay but simply need time, there are some nice changes the IRS has made to its normal collection procedures. These include:
• Increase the length of short¬-term payment plans from 120 days to 180 days.
• Allow taxpayers additional time to make payments on an accepted offer in compromise.
• Automatically add certain new tax balances to existing installment agreements for individual and out¬-of-¬business taxpayers instead of defaulting the agreement.
• Allow individual taxpayers assigned to campus collections who owe less than $250,000 to set up installment agreements without providing a financial statement.
• Allow some individual taxpayers who owe less than $250,000 to qualify for an installment agreement without a notice of federal tax lien filed by the IRS.
• Enable qualified taxpayers with existing direct debit installment agreements to use the online payment agreement system to propose lower monthly payments and change their payment due dates.
What do these changes mean and which strategies should you consider when addressing your tax debt? You have some options.
The $250,000 Streamlined Tax Debt Payment Installment Agreement
It’s not a secret. The IRS wants its money as quickly as possible. They’ll seek to have taxpayers liquidate investments and retirement accounts and even tap equity in their home. By utilizing the procedures below, you can avoid that and get into a payment plan to resolve your tax issue.
The IRS has always had a streamlined installment agreement available for qualified taxpayers. Basically, a streamlined installment agreement is an agreement with the IRS to repay the debt within the terms laid out. If the taxpayer qualifies and can meet the terms, the taxpayer won’t have to submit a financial form (Collection Information Statement) and disclose assets and income.
These agreements are beneficial because, aside from avoiding disclosing assets and income, the taxpayer doesn’t need to spend money on a professional to complete the forms and begin negotiating with the IRS. The agreement can be put in place with a simple phone call or by going online and setting it up through the IRS portal.
Streamlined agreements have changed over time. Due to the sheer number of taxpayers the IRS believes will need help due to COVID¬19, they have made these agreements easier than ever.
Tax Debt Relief: Offer in Compromise (OIC) Payments
The IRS OIC program generally allows for two types of offers: a lump-sum offer and a short-term deferred offer. A lump sum offer is one in which the taxpayer agrees to pay the offered amount within five months of the date of acceptance.
A short-term deferred offer, also known as a “periodic payment offer,” has the taxpayer making monthly payments while the offer is pending. They then will pay the balance of the offer in more than six months (but not more than 24 months).
The short-term deferred offer operates the same as a lump sum offer. The exception is the taxpayer must begin making monthly payments and continue making them while the offer is being con¬sidered, just like an installment agreement. Any hardship caused by COVID19 may also be considered to grant additional time.
Strategies to Tackle Tax Debt in 2021
Some strategies can be employed to get the best result for our clients. For instance, assume we have a client who owes $300,000 for 2020. The taxpayer has an IRA with $150,000 and a home with no mortgage worth $450,000. The taxpayer’s income and expenses show an ability to make payments of $5,000 a month. Our client, though, doesn’t want to make payments at that rate because, economically, it would make life a bit rough.
The taxpayer could do the following:
• Call and set up a short-¬term (six month) payment plan to pay the balance. Once that’s set up, they could make six payments of $5,000 each. After the six months, they now owe $270,000.
• Call automated collections, explain they could not raise all the money, but ask for first-time penalty abatement. This would remove 1/2 % a month for eight months (from April 2020 – December 2020) for the failure to pay penalty, or 4%. The reduction of the 4% from the $300,000 would remove approximately $12,000 of accumulated penalty, reducing the liability to $258,000.
• Get a home equity line and use $10,000 from that to reduce the liability below $250,000.
• Create a streamlined installment agreement (below $250,000 over the time remaining on the collection statute, which is approximately 114 months). The monthly payment should be around $2,300 a month, and they won’t have to liquidate their IRA or get stuck paying $5,000 a month for five to six years.
These numbers are rough, but hopefully they demonstrate that you can be creative and combine some of these options to reach a solution that works to your advantage—or is easier to swallow than the IRS’s straight analysis.
Here, we can decrease penalties, use the short¬-term payment plan to buy time and pay down below the $250,000 streamlined cutoff to avoid the disclosures and get into an affordable monthly payment plan.
Each client’s situation is unique. Understanding the rules is the first step to mastering the game, and it’s a game that is interesting, challenging and potentially extremely profitable to those of us who handle IRS representation matters.
If you would like to learn how these strategies could apply to your current situation, please give us a call and we’ll be happy to help. With some planning and guidance, your tax debt could become a lot more manageable. Contact us at 614-802-6950 for more information.
