Sam Brotman, JD, LLM, MBA September 30, 2013 7 min read

Tax Liability Resolution Options

Once an IRS tax liability has become final, the taxpayer has a few options for dealing with an IRS liability. Each of these options carries its own advantages and disadvantages and taxpayers should take the opportunity to learn fully about the different ways of settling their balances before proceeding with one option or another. As a helpful guide to assessing what exactly the consequences of each action are, I have put together a short list of some of the advantages and disadvantages of each option.

Tax Liability Resolution Option #1 - Pay the liability in full

Advantages:

- Settles the balance quickly without having to deal with IRS collection actions.

- Often, the IRS will give you 90-120 days to gather the needed funds to pay the liability off.

- Avoids additional interest accrual on the account

Disadvantages:

- Option is available to very few taxpayers

- Statutory interest is often less than the interest accrued through other sources of borrowing

- May cause financial hardship to the taxpayer.

 

Tax Liability Resolution Option #2 - Ask the IRS to place you in “Currently Non-Collectible” status, suspending collection activity on your tax liability.

Advantages:

- Allows temporary flexibility to taxpayer who need short term relief from IRS collections

- Stops all collection activity

- Shortens the amount of time in the ten year collection statute that the IRS has to actively collect

Disadvantages:

- Interest continues to accrue on the account

- Not a permanent solution to IRS collections

- Non-collectible periods are set by IRS collections and “non-collectable” status can be revoked

 

Tax Liability Resolution Option # 3 - Enter into a payment agreement with the IRS for your tax liability

Advantages:

- Stalls IRS collection activity as long as a taxpayer is making installment payments.

- Can help the taxpayer run out the ten year collection statute without having to pay the full liability

- Payment agreements can be flexible and take taxpayer financial hardship into consideration

Disadvantages:

- Installment arrangements are based on rigid IRS collection standards

- IRS collection agents will fairly insistent on taxpayers paying the maximum they can afford

- Interest continues to accrue on the balance of the liability

 

Tax Liability Resolution Option #4 - Settle your tax liability with the IRS through the Offer in Compromise program

Advantages:

- Settles your liability for less than the full amount owed

- Eliminates the need to wait until the expiration of the collection statute

- Recent changes in the Offer in Compromise program has made it easier to get offers accepted

Disadvantages:

- The IRS accepts less than 20% of offers submitted

- Requires the taxpayer to provide detailed financial information

- Requires full compliance for five (5) years following an accepted offer

- Default on an accepted offer will default the offer and reinstate the full liability

- Stops the 10 year collection statue from running; gives IRS additional time to collect

 

Tax Liability Resolution Option #5 - Eliminate the tax liability through bankruptcy

Advantages:

- Settles a tax liability for less than the full amount owed, other than through an offer in compromise

- Bankruptcy status freezes IRS collection activity on an account

- Once discharged, bankrupted liabilities cannot be reinstated

Disadvantages:

- Declaring bankruptcy can have numerous adverse financial side effects

- Not all tax liabilities are dischargeable in bankruptcy

- After bankruptcy status is removed, whether fully discharged or not, the IRS will most likely file liens in order to protect its interest in remaining property.

- Stops the 10 year collection statue from running; gives IRS additional time to collect

 

Tax Liability Resolution Option # 6 - Wait for the ten-year statute of limitations to collect on your tax liability to expire.

Advantages:

- Discharges tax liabilities for less than the full amount owed

- Once the statute expires, the taxpayer’s account is removed from collections if no other balances exist.

- Liens for expired tax years are also removed at the end of the ten year statute

Disadvantages:

- Not really a method of dealing with IRS collections; you are “on the run” from the IRS during the life of the balance

- No protection against IRS collection activity

- IRS will become increasingly aggressive with high balances or in the later years of the liability

- Cases have a higher likelihood of being referred to a revenue officer

- Although rarely prosecuted, willfully evading the payment of taxes is a felony and carries civil and criminal penalties if caught.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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