Sam Brotman, JD, LLM, MBA January 22, 2021 13 min read

Individual Tax Liability In The Time of COVID-19

Few entities are as powerful as the IRS and if you’ve received notification that you owe them, it can be very daunting. Even if you aren’t in debt, you may still be wondering what COVID-19 and the policies put into place last summer might mean to taxpayers this year.

To help clear up any worry and confusion, we have provided a framework of the process put in place for those who owe a tax liability to the IRS. In summary, we will tie it together about how COVID has impacted these procedures.

How to Resolve Your IRS Collections Issues

Be assured, if you owe on your taxes, you have options when it comes to resolving IRS Collections Issues. Choosing the best option for you is vitally important and will come down to what best suits your situation.

The first option is to pay the liability in full. Penalties, which will be discussed more fully, are negotiable—particularly if this is your first offense. The fastest way to reconcile your debt is stopping by your local IRS office and dropping off a check, although you can also work out paying the tax liability over time.

The second option is to request a 120-day extension to pay in full. These extensions are automatically granted, especially if there is no prior history of non-compliance. Additional holds may be negotiated, but it is important to note that during this time, interest and penalties continue to accrue. Due to COVID-19, there may be an option for a 180-day extension to pay for certain taxpayers.

For the thrill seekers, running and dodging is always an option. However, this presents a few problems:

  1. You (the tax dodger) will never be sure if your wages and assets will remain safe.
  2. Your credit will take a hard hit.
  3. The severe psychological effect it could have on you.

The fourth option is for taxpayers who are facing financial hardships. Such taxpayers can claim Currently Non-Collectible (“CNC”) status. This requires a submission of basic financial information. A lien may be filed in cases where the taxpayer owes more than $10,000. This status is temporary, but absent a change in financial circumstances, the taxpayer may stay in non-collectible status indefinitely.

Another option is entering into one of four different payment plans:

  1. An automatic installment agreement.
  2. A streamlined installment agreement.
  3. A partial payment installment agreement or,
  4. An installment agreement.

Streamlined installment agreements are mostly used for taxpayers with less than $50,000 owed and always used for taxpayers with less than $25,000 owed. Financials are required for taxpayers who owe over $50,000.

If an installment agreement is rejected, the IRS will issue a formal notice of rejection. Upon receiving this notice, the taxpayer has the right to go to appeals, where they will make their determination based on the taxpayer’s financials.

Option six – the Offer in Compromise – is a tax settlement. Part of this offer requires the taxpayer to comply with tax regulations for five years, which means the taxpayer needs to file and pay all taxes on time.

There are three types of offers in compromise:

  1. Doubt as to collectability (most common).
  2. Doubt as to liability (means it has not been adjudicated in tax court, and is usually not the best approach); and,
  3. Effective tax administration.

Offers in compromise are not based on amount owed, but they are based on a taxpayer’s reasonable collections potential. There are a few issues with offers in compromise.

First, the IRS will normally count assets the taxpayer has disposed of towards the offer in compromise. Second, there are valuation issues for illiquid assets and third, the IRS will look at future income potential for the taxpayer.

Then too, there is the option of bankruptcy. This is generally not advisable, but it is always on the table.

IRS Penalties

When you owe the IRS, you not only owe the tax amount due, but penalties on top of that. Failure to pay usually results in a percent penalty of the tax owed for each month. The IRS does this as a way to encourage compliance.

COVID-19

During these unprecedented times, the IRS has expanded resolution options to help people who owe money. In April, the IRS created the People First Initiative to help taxpayers. This expired in July 2020, so in November of the same year, the IRS created another Taxpayer Relief Initiative to help taxpayers set up payment agreements and other relief options.

As discussed previously, taxpayers who qualify for a short-term payment plan option have up to 120 days to resolve their tax liabilities. However, under the COVID-19 initiative, taxpayers now have up to 180 days to resolve their tax liabilities.

The IRS is also allowing for less documentation for installment agreements. For some qualified taxpayers who owe less than $250,000, setting up installment agreements without providing a financial statement or substantiation of their monthly payment proposal is now sufficient.

Additionally, some individual taxpayers owing less than $250,000 for the 2020 tax year may qualify for an installment agreement without a notice of federal tax lien filed by the IRS.

For taxpayers with existing Offers in Compromise who are struggling to pay due to COVID, the IRS says that it will be "offering additional flexibility." If the taxpayer cannot make their payments, then the IRS will allow a delay in the collection process. The taxpayer will be labeled as not currently collectible. In this scenario, the collection will be delayed until the taxpayer’s financial situation improves. However, the debt does not go away, and the penalties and interest will continue to accrue.

Finally, if you have reasonable cause for failing to file, pay and/or deposit on time due to COVID-19, you may qualify for penalty relief. Illness is considered a reasonable cause, but not having enough money is generally not enough on its own to qualify.

In addition, under the IRS’s First Time Penalty Abatement policy, a taxpayer may have relief if the following are true:

  • The taxpayer did not previously have to file a return or had no penalties for the three tax years prior to the tax year in which her or she received a penalty.
  • The taxpayer filed all currently required returns or filed an extension of time to file and,
  • The taxpayer has paid, or arranged to pay, any tax due.

Because penalties will continue to accrue until the taxpayer pays, if you choose this approach, it would be wise to pay the taxes dues before asking for the penalty abatement.

What’s Ahead?

Going into 2021, it is predicted that the IRS will buff up enforcement. The government will look for ways to find more funding because of the pandemic. Raising taxes will not be a popular stance, but the IRS will likely increase scrutiny.

This means the IRS will increase face-to-face visits with people who owe taxes. As mentioned, targeting higher taxes and people who have suffered because of COVID-19 will be unpopular, so it is projected that the IRS will target high net worth individuals.

One way they will do this is by targeting cryptocurrency, which has surged as of late because of uncertainty in the economy. Cryptocurrency, such as Bitcoin, has gained popularity because of how difficult it is to track, and therefore difficult to tax. To combat this, the IRS will begin to investigate virtual currency more diligently than before.

The IRS has also begun to closely scrutinize compliance with different COVID relief programs like the CARES Act to make sure nobody is avoiding taxes by taking advantage of these relief programs.

With the situation ever-changing and the IRS strengthening enforcement, there may be a lot of continued uncertainty for taxpayers. If you still have questions regarding individual tax debt and COVID-19, please contact my office. Our team of tax professionals are ready to help.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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