The best way to get relief from an IRS collection problem is to consider the complete picture before jumping in. A quick way out may be desired, but it is important to look carefully before you leap.
Here are three things that I recommend that you carefully consider before taking on an IRS problem:
(1) How do you wish to resolve your IRS problem, and is it obtainable?
The best known option to resolve an IRS problem is an offer in compromise. If your goal is settlement, it is important to carefully consider whether you are a good candidate before plunging in.
The IRS has specific formulas for calculating what they will settle for. You will find the formulas are often different from your real world situation. The most disputed item in an offer in compromise is the difference between what your living expenses are and what the IRS will allow you.
Anticipate the issues your compromise could present before jumping in with it – understand in advance how the IRS will apply their guidelines to your situation.
And always make sure that just because you can accomplish a compromise, the settlement value is obtainable for you. If you owe $150,000 but the settlement value is projected to be $75,000 – due in part to the IRS formulas – does that work for you? That is a 50% settlement, but still a significant payment. If it is not realistic other options should be considered – maybe bankruptcy, where the IRS formulas are not necessarily as rigid, or an installment agreement over the remaining collection timefram.
(2) What property can the IRS take from you?
Every IRS collection case involves understanding what your risk of levy and property seizure is. Know that IRS seizures of real and personal property are serious, but actually quite rare. It is important to negotiate based on the real risk of levy, not perceptions or myths.
Some assets – like everyday household goods – are exempt from IRS seizure by law. Additionally, the IRS cannot take property if it does not result in an economic recovery to them. That means that the IRS is not interested in your car with a bank loan. Same for your house. Those assets have no equity for the IRS.
The IRS prefers taking liquid assets, like cash in a bank account and wages. But even to do that, the IRS must first provide you with important rights of notice and appeal to permit you to resolve the account before they can levy. Before jumping in, it is important to know what the IRS can take, and whether they procedurally are able to do so.
(3) How much time is left on the statute of limitations on collection?
In most every situation, the IRS has 10 years to collect an unpaid tax liability. The 10 years starts when the IRS puts your liability on its books – this should be when you filed your return. The statute of limitations on collections provides an end date to IRS problems.
But what you do during the 10 years can impact your end date. For that reason, it is important to look before you leap.
Take an offer in compromise, for example. An offer in compromise extends the time the IRS has to collect by the timeframe it is pending. Most offers can take up to a year. If your offer does not work, you have just given the IRS more time to collect – you are actually worse off.
If the IRS has one or two years left to collect from you, pursuing an offer in compromise may not be in your best interest. It would likely be better to hold the IRS off with an installment payment or hardship/uncollectible claim, especially since the compromise can take a year to investigate and finalize.
All three of these points fit together – your goals/options, your collection risk and the end date under the statute of limitations on collections. The best approach to solving IRS problems is careful consideration of your situation as a whole before jumping in.