You try to make sure that your clients don’t get a surprise come May 17th, but clients don’t always listen to their tax professional’s sage advice. Every year, some taxpayers are handed tax bills that they are unable to pay. In 2019, over 11 million taxpayer accounts were delinquent. And this delinquency isn’t something that the IRS takes lightly. They can seize taxpayer property to satisfy a tax debt, garnish wages, or take money from bank accounts. For seriously delinquent tax debt, your client could be denied a passport, and their existing passport could be revoked.
If your client comes to you with a tax bill that they cannot pay, there are options. The IRS knows that there are situations where taxpayers may not have the funds available immediately, and have created payment plans and programs that can help keep your clients from facing the negative repercussions from an unpaid tax bill.
Short-Term Payment Plans
If your client can pay off their debt in 180 days, a short-term payment plan is the easiest route for them to take. There’s no fee for setting up a payment plan, but interest and penalties will accrue on the balance until the tax debt has been paid in full.
Short-term payment plans come with a $0 setup fee. Clients can apply online through the Online Payment Agreement (OPA) application or by phone. Applying online will only grant clients a maximum of 120 days to repay their debt.
Long-Term Payment Plan (Installment Agreements)
If your client isn’t able to pay their balance within 180 days, they have the option of repaying their debt with a long-term payment plan. With a long-term payment plan, taxpayers can extend their repayment for more than 180 days and make monthly payments to pay off their debt. Monthly payments can be set up to come directly out of their bank account, to be paid via a payroll deduction, or they can make their payment monthly by credit card, check, or money order.
A long-term payment plan comes with additional fees your client should be made aware of. There is a set-up fee, which can be as much as $225. If your client is low income, they may qualify for a reduced or waived fee.
Offer in Compromise
An offer in compromise is an agreement your client strikes with the IRS to eliminate their tax liability when they pay an agreed-upon amount. This agreed-upon amount is less than what your client actually owes, which is a major win for someone who is drowning in a tax bill larger than anything they can imagine paying.
But it’s not that easy to get the IRS to waive some of your client’s debt. To be eligible for an offer in compromise, your client must meet certain criteria. They cannot be in an open bankruptcy proceeding. They will need to have filed all previous tax returns and made all required estimated tax payments for the current year. And if they are a business owner with employees, they need to have made all required federal tax deposits for the current quarter.
When your client applies for an offer in compromise, the IRS estimates the most they can expect to receive within a reasonable period of time. They look at criteria like your client’s ability to pay, their income, expenses, and assets, as well as whether paying the full amount of tax liability would create a financial hardship for your client.
An offer in compromise can be made in either a lump-sum payment or overtime with periodic payments. To apply for an offer in compromise, there is a $205 application fee. The IRS has a pre-qualification tool to help your client confirm eligibility and prepare a preliminary proposal.
If your client is in a dire financial situation and repaying their tax debt would keep them from meeting their basic living expenses, they can request that the IRS delay collection of their tax debts until they can pay. Your client will have to provide evidence of their current financial situation, including information about their income, expenses, and assets.
Their debt will continue to accrue interest and penalties while the collection is delayed. During the delay, the IRS will continue to review your client’s financial situation to determine if they still do not have the ability to repay.
Don’t let your clients live in fear of an unpaid tax bill. Help them navigate the options that work best for them to dig themselves out of tax debt.