IRS Liens

When a taxpayer owes taxes, the IRS typically postpones enforcement actions, such as placing a tax lien or seizing property, until the taxpayer has been given an opportunity to voluntarily pay the tax or establish payment arrangements. This approach allows taxpayers to address their outstanding tax liabilities without immediate legal consequences.

When a taxpayer is facing enforcement action, they typically receive four computerized notices from the IRS. These notices are as follows:

1. CP14: This notice informs the taxpayer about the amount of tax owed and provides instructions on how to address the issue.
2. CP501: The CP501 notice serves as a reminder of the outstanding tax liability and emphasizes the importance of timely payment.
3. CP503: If the taxpayer still hasn’t resolved the issue, the CP503 notice is sent, indicating that immediate action is necessary.
4. CP504: The CP504 notice is a final warning before enforcement actions such as liens or property seizures are initiated.

Reading these notices thoroughly is crucial to protect the taxpayer’s rights. Additionally, arrangements can be made with the IRS to help the taxpayer come into compliance and address their tax obligations. 📜💼

These arrangements include:

• Installment Agreements
  • Full or partial payment
• Offers in compromises and delaying collection until the taxpayer’s financial condition improves
  • Placing the account in currently not collectible (CNC) status

It’s crucial to focus on two key aspects, especially in the case of a serious delinquency (meaning the amount owed exceeds $250,000):

1. Collection Status Expiration Date (CSED): The CSED represents the deadline by which the IRS can legally collect the outstanding tax debt. It’s essential to be aware of this date, as it determines when the IRS’s collection efforts expire.
2. Lien Determinations: In such cases, the IRS may directly assign the case to an IRS Revenue Officer rather than handling it through the Automated Collection System (ACS). This personalized approach ensures that the taxpayer’s situation is thoroughly evaluated.

The IRS will grant up to 180 days to pay liability in full.

To request an extension, individuals have two options:

1. Online Payment Agreement Tool: Taxpayers can use this online tool to set up an extension. It’s a convenient way to arrange for additional time to pay taxes. Unlike installment agreements, there is no setup fee associated with this type of extension.
2. Phone Call to the IRS: Alternatively, taxpayers can call the IRS to request an extension. Speaking directly with an IRS representative allows for personalized assistance.

Benefits of this extension:

• Reduced Penalties and Interest: Taxpayers who opt for this extension typically pay lower penalties and interest compared to other methods.
• Qualification Criteria: To qualify, a taxpayer must owe less than $100,000 in combined tax, penalties, and interest.

Under the IRS Fresh Start Initiative, individuals who find themselves in a situation where they would need to sell property at a reduced price if they paid the tax on time (or face similar undue hardship) can request an extended time to pay. As part of this initiative, late-payment penalties may be waived for those who qualify. It’s a helpful option for those facing financial challenges. 🌟🏦

File Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. The conditions under which extensions may be granted under Sec. 6161 are printed on the back of the application. Interest still accrues.

An Offer in Compromise (OIC) is an arrangement that permits a taxpayer to settle their debt for an amount less than what they owe. The Internal Revenue Service (IRS) grants this relief only if the offer represents the maximum amount they can reasonably expect to collect from the taxpayer within a specific period. To learn more about the necessary forms, user fees, and other terms, refer to Form 656-B Booklet, Offer in Compromise. Keep in mind that OICs can extend the statutes of limitations, and a federal tax lien may be filed as part of this process.

To be eligible for an Offer in Compromise (OIC), the taxpayer must meet the following criteria:

1. Filed Tax Returns: The taxpayer must have filed all their tax returns.
2. Received a Bill: They should have received a bill for at least one tax debt included in the offer.
3. Estimated Tax Payments: All required estimated tax payments for the current year must be made.
4. Business Owners with Employees: If the taxpayer is a business owner with employees, they must have made all required federal tax deposits for the current quarter and the two preceding quarters.

Payment Options for OICs include:

• Lump Sum Cash Offers: Paying a reduced amount in a single payment.
• Periodic Payment Offers: Spreading payments over a period of time.

Remember that participating in an OIC can extend the statutes of limitations, and there’s also the possibility of a federal tax lien being filed as part of the process.

When a taxpayer faces financial hardship and cannot afford to pay both their owed taxes and basic living expenses, the IRS may place their account in Currently Not Collectible (CNC) status. Here are the key points:

1. CNC Status: The IRS agrees that the taxpayer’s financial situation prevents them from making payments. While in CNC status, the IRS will cease collection activity.
2. Tax Lien: If the taxpayer owes more than $10,000, the IRS will still file a federal tax lien, even during CNC status.
3. Temporary Status: CNC status is temporary, and the IRS will periodically evaluate (usually annually) whether the taxpayer’s financial circumstances have changed.
4. Penalties and Interest: Despite being in CNC status, penalties and interest will continue to accrue.

According to Section 6159, the IRS is authorized to establish written agreements with taxpayers. These agreements allow taxpayers to make installment payments toward their tax liabilities. The IRS makes this determination based on whether such an agreement will facilitate full or partial collection of the liability.

Taxpayers have several options for installment agreements:

1. Guaranteed Installment Agreement: Qualifying taxpayers can set up a guaranteed installment plan.
2. Discretionary Installment Agreements: These are further categorized into:
   • Streamlined Installment Agreement: For straightforward cases.
   • In-Business Trust Fund Express Installment Agreement: Designed for businesses.
   • Regular Installment Agreement: A more flexible option.

Remember that these agreements help manage tax payments over time, but it’s essential to understand the terms and conditions associated with each type.

To set up an installment agreement with the IRS, you have several options:

1. Online Payment Agreement Tool: Utilize the Online Payment Agreement Tool available on the IRS website.
2. Form 9465: File Form 9465, which is the Installment Agreement Request for individuals.
3. Form 433-D: Alternatively, you can use Form 433-D, which is specifically for installment agreements.
4. Contact the IRS: Give them a call to discuss your situation and explore payment options.
5. Written Communication: You can also write to the IRS.

Keep in mind that there is a setup fee, and in some cases, you may need to submit a financial statement. Make sure to follow the appropriate steps based on your circumstances.

Section 6331 of the Internal Revenue Code states that no levy (seizure of assets) can be carried out while certain installment agreements are pending or in effect. The determination of whether to file a federal tax lien depends on the dollar amount of the liability. If a taxpayer submits an offer in compromise or their account is placed into uncollectible status, a federal tax lien may be filed.

For certain taxpayers who enter into installment agreements on timely filed returns, the failure-to-pay penalty is reduced from half a percent to a quarter percent per month for any month in which an installment agreement is in effect. However, if the agreements are terminated, penalties increase to one-half percent.

Remember that these provisions aim to balance taxpayer obligations while ensuring efficient tax collection.

Additionally, if a taxpayer exercises their right to appeal either an installment agreement rejection or termination, the running of the collection period is suspended from the time the appeal is pending until the appealed decision becomes final.

Tax Compliance Requirement:

Before approving an installment agreement, taxpayers must be in tax compliance.

Compliance includes filing tax returns and paying estimated taxes and federal tax deposits.

These obligations must be current from the date the installment agreement begins.

If it’s likely that a taxpayer will owe taxes at the end of the year, the accrued liability may be included in the agreement.

Pending Installment Agreement Requests:

When a taxpayer requests an installment agreement, the running of the Collection Expiration Statute Date (CESD) is suspended.

The request remains pending until it is reviewed, approved, and an installment agreement is established, or the request is withdrawn or rejected.

If the requested installment agreement is rejected, the running of the collection period is suspended for 30 days.

Default and Termination:

Under certain conditions, Section 6159(c) mandates that the IRS must accept installment payment proposals if the taxpayers are individuals who:

• Owe only income tax of $10,000 or less (excluding penalties and interest);
• Have not failed to file any income tax returns or to pay any tax shown on such returns in any of the previous five taxable years;
• Have not entered into an installment agreement in any of the previous five taxable years; and
• Commit to fully paying the tax liability within three years.

1. Streamlined Installment Agreement

Taxpayers may be relieved under the following conditions:

• The total of tax liability, interest, and penalties does not surpass $50,000.
• The balance is payable within 72 months or by the Collection Statute Expiration Date (CSED), whichever comes first.
• The taxpayer has consistently filed all required income tax returns.

The suggested payment amount meets or exceeds the “minimum acceptable payment,” which is the larger of $25 or the sum obtained by dividing the tax liability, interest, and penalties by 72.

No financial statement is necessary, and no lien determination is made.

2. In-Business Trust Fund Express Installment Agreement

In-business trust fund express installment agreements can be approved under the following conditions:

The total assessed tax liability, including interest and penalties, does not exceed $25,000. This excludes unassessed accrued penalties and interest.

The taxes must be paid in full within 24 months or before the Collection Statute Expiration Date (CSED), whichever comes first.

A financial statement is not required. However, if the owed amount is between $10,000 and $25,000, the taxpayer is obligated to enter into a direct debit installment agreement.

There is no requirement for a lien determination. Refer to IRM 5.12.2.3.1 for more information.

3. Regular Installment Agreement

Regular installment agreements are used when the taxpayer doe not qualify for any of the above. For an individual taxpayer, this typically means the taxpayer owes more than $50,000 and needs longer than 72 months to payoff the liability.

The IRS may file a federal tax lien to protect its interest in collecting the debt.

Certain qualified individual taxpayers who owe less than $250,000 may set up an IA without providing a financial statement or substantiation if their monthly payment proposal is sufficient.

If full payment cannot be achieved by the CSED, and a taxpayer has some ability to pay, the taxpayer can apply for a partial-payment installment agreement. A full collection information statement is required, and Forms 433-A and/or 433-B must be completed (used to determine the taxpayer’s ability to pay).

There is a lien determination.