Every taxpayer in American should be familiar with their obligation to file their tax returns to the federal government every year. If necessary, the IRS offers extensions to file tax returns but they do not offer the same extensions to pay. In order to resolve delinquent tax debts, the taxpayer must provide some type of a collection alternative to immediately paying in full.
Taxpayers can resolve their unpaid taxes through one of a few different methods that the IRS provides. If your tax debt is in excess of $50,000, schedule a consultation with Pontius Tax Law to discuss options to resolve your unpaid taxes in Washington DC.
If the taxpayer agrees with the underlying assessment (i.e., the balance due) they may have a benefit of paying it in the present because it would save them from accruing penalties and interest down the road. Tax debt is kind of like a more intense version of credit card debt, and if someone does not pay it, the penalties and interests can sometimes double the underlying tax debt. It is important to have a plan when resolving IRS tax debt or it can quickly become overwhelming to resolve.
An Offer in Compromise (OIC) is a tool in which the IRS can settle the tax debt for less than the amount than the taxpayer owes. A taxpayer is eligible for an OIC if their tax debt exceeds their ability to pay over the collection statute of limitations, which is generally 10 years – or 120 months. The IRS will look to a taxpayer’s assets and monthly net income to determine if they are eligible. An OIC amount is determined by calculating the reasonable collection potential (RCP).
There is a specific formula that the IRS uses to determine the reasonable collection potential for a taxpayer. They first look at the taxpayer’s assets, minus the liabilities. Then they take the taxpayer’s net income – meaning their monthly gross income, minus their various necessary life expenses. IRS standards dictate some of those life expenses for things like housing and vehicles, taxes that they must pay, et cetera.
Then that monthly net income is multiplied by either 12 or 24 months, depending upon how quickly the offer will be paid. If the offer is to be paid within 5 months of acceptance, it will be multiplied by the factor of 12. If it will be paid over 24 months, the multiplier would be 24. As a result, if a taxpayer can pay their debt off in 5 months, it would greatly reduce the cost of their offer. Additionally, taxpayers must make a 20% non-refundable down payment to file an Offer in Compromise.
To determine the RCP, the IRS will review bank statements, retirement account, home values, mortgage statements, car values, pay stubs, and expenses, which is why it is important to have a DC lawyer assess all these things when deciding on options to resolve unpaid taxes.
Currently not collectable status, or CNC status, is a temporary suspension of enforced IRS collections until the taxpayer can get back on stronger financial footing. To maintain CNC status, all future tax returns must be timely filed and paid.
A taxpayer may want to enter currently not collectable status if they are unable to make any payments towards their outstanding IRS bills. If they do not qualify for an Offer in Compromise, then the CNC could be a temporary band-aid on a bigger problem, and it could give a lawyer more time to resolve the underlying tax debt.
An installment agreement is a payment plan that will generally be paid out over a period of months. There are full-pay installment agreements, in which a taxpayer will fully pay the tax debt, and there are partial payment installment agreements, which would partially pay their tax debt before the collection statute of limitations expires. For the IRS and for the DC Office of Tax and Revenue, that statute of limitations is 10 years. For Virginia state taxes, the statute of limitations is 7 years. Before 2019, Maryland did not have a collection statute of limitations. Tax debts assessed in 2019 and thereafter have a 20-year statute of limitations.
A taxpayer should request an installment agreement when they do not qualify for an Offer in Compromise and if it seems inevitable that will have to pay back their tax debt based upon their financial situation. That is typically the most straightforward way to resolve unpaid taxes for a Washington DC taxpayer.
The monthly payments for a full-pay installment agreement are determined by taking the total amount of tax debt, divided by the months that it will be paid out of. The IRS will approve or reject the application based upon the amount of the tax debt, the time remaining on the collection statute of limitation, and the taxpayer’s current financial situation.
Most tax debt under $50,000 can be resolved by the taxpayer and the IRS, potentially with an online installment agreement request. Larger tax debts will be assigned to a Revenue Officer, also known as a bill collector, who will more aggressively pursue and force collection until the tax debt is resolved. The larger the tax debt, especially over $50,000, the larger the IRS enforcement efforts are most likely be.
The tax attorney’s role is to evaluate many variables, including the amount of tax debt, the amount of years left on a collection of statute of limitations, the taxpayer’s financial situation, and where the IRS currently is in terms of enforced collection (whether it is with automated collection service or with a Revenue Officer). Different tactics may be required depending upon the facts of the taxpayer’s situation.
If you owe taxes to the federal government but have not yet paid them or do not currently have the ability to pay, we can provide solutions. There are several options for resolving unpaid taxes in Washington DC which you could take advantage of. Please reach out to us and set up a time to discuss your situation.