An Almost Unheard of Tax Settlement Alternative
The government is relatively tight lipped about a program that permits taxpayers to make minimal payments and never repay the tax. Most of the tax obligation is written off by the IRS. The taxpayer may eventually walk away free and clear of any further obligation to the government.
It’s a legitimate tax solution and it’s called a partial pay installment agreement, or “partial pay” for short. Agreements that do not pay the IRS in full are permitted by the Internal Revenue Manual 5.14.2. Pursuant to Internal Revenue Code 6159(a), the IRS may enter into an agreement that allows full or partial collection of the unpaid tax liability.
You don’t often hear about partial pay because neither the tax resolution companies nor the IRS promote it. For some clients, partial pay is the ideal solution. As long as you make the minimal payments, the IRS will leave you alone.
To the right is a client document where the IRS agreed to a $25 dollar a month partial payment plan on a $156,000 tax bill.
Partial pay can be permanent, or it can be a temporary solution to neutralize IRS collection and ideally position a citizen to eliminate tax liability using another method.
How Long Does a Partial Payment Agreement Last?
Long enough to eliminate the bulk of the tax, is the short answer. You see, the idea is to make payments until the IRS statute of limitations expires. By law, IRS collection does not last forever, and neither do partial pay agreements. As we discussed in another article, the IRS has 10 years to collect the tax from the time the IRS determines that you owe the tax. In most cases, the 10 year time starts when you file your tax return. The collection time limit also begins when the IRS determines that you owe them because of an audit. If you don’t file a tax return, the time limit does not start until you file a return or the IRS files a return for you, called a “Substitute for Return.”
The Advantages of a Partial Pay Agreement
Let’s compare partial pay to an offer in compromise. First, a partial pay agreement is accepted by the IRS in a relatively short period of time. It can take just a matter of months, not years, to get a partial pay deal done. An offer in compromise can take close to two years to get done, and if the offer is accepted, the taxpayer has to adhere to strict conditions for five years.
The process to get a partial pay agreement accepted is less formal. Your tax attorney creates financial statements and submits them to the IRS. Compare this to an offer in compromise that is a longer, more formal process.
Once the partial pay agreement is approved, the IRS will review the agreement every two years. You or your tax professional will submit updated financial statements to the IRS. The payments might remain the same, increase, or decrease. The partial pay agreement can also be terminated by the IRS or the taxpayer.
Example: Let’s say you owe $75,000 and we determine that the IRS has four years left to collect your tax debt. We negotiate with the IRS and get them to agree to take payments of $180 a month. By making payments of $180 a month for four years (48 months) you will pay $8,640. At the end of four years the collection statute of limitations runs out on the IRS. You are now tax debt free. You were effectively able to settle $75,000 for $8,640. Once the statute of limitations expires, the IRS will cease collection, you will stop paying the IRS, and the IRS will write off the tax you owe.
The Lesson Learned About Tax Problems
The cookie cutter approach will not solve most tax problems. As you can see, you have a menu of solutions to consider. The offer in compromise works wonders for many folks, but it’s not for everyone. Partial pay is likewise a solution for many, but it’s not for everyone either. You need to look at other solutions too, like hardship status and bankruptcy and installment agreements.
If you would like the "No B.S." truth about solving your tax problems, feel free to give me a call: 800 659 0525 or 414 771 9200 - day or night.