The Pros and Cons of Common Tax Collection Solutions

It happens all too often that a taxpayer winds up with debt that he or she simply cannot pay off by the time it becomes due. Whether personal stressors that pushed staying on top of tax obligations to life’s back burner, or a series of misguided business decisions that unwittingly led to greater tax consequences than anticipated, or something else entirely. Finding oneself in seemingly unmanageable tax debt can be overwhelming and distressing. The best thing to do is simply pay off the tax debt as soon as it becomes due to avoid penalties, interest, and other headaches. Unfortunately, that is not always possible.

Thankfully, there is hope. There are a multitude of options for you if you find yourself struggling to pay your federal taxes. Here are a few of the pros and cons of the most common ones.

Full or Partial Payment Plan

Here, you enter into what is essentially a loan agreement with the IRS. The IRS will look at how much you owe and how much you are able to pay, and will calculate manageable monthly payments that you will make until the debt is paid off.

It’s important to keep in mind that the IRS can only collect on a tax debt for 10 years after the relevant tax return is filed. That is where the difference between a full and partial payment plan comes in. If the IRS determines that a taxpayer will not be able to pay off their tax debt within 10 years by making the largest monthly payments they are financially able to, then the IRS will accept the amount of the debt that can be collected within that timeframe.

Pros

Relatively easy to obtain. Compared to the other collection options, this is the easiest to obtain and the one that the IRS is most likely to accept.
Allows you to pay off your debt over time without worrying about the IRS coming after your assets.

Cons

Currently Not Collectible (CNC) Status

If a taxpayer has so little income that all of it is needed to pay for the taxpayer’s reasonable living expenses, and the taxpayer does not have any assets that could be reasonably liquidated, they may qualify for currently not collectible status. Here, the taxpayer’s account with the IRS is flagged so that the IRS cannot collect any taxes from them.

Pros

Complete immunity from IRS collection enforcement. For the period of time you are in CNC status, the IRS cannot take any measures to collect your tax debt.

Cons

Offer in Compromise

In this case, the taxpayer enters into a contractual agreement with the IRS to settle the tax debt for less than the full amount, and pays that amount in either a single lump sum or via a payment plan. In order to qualify, the offer must meet or exceed the taxpayer’s “reasonable collection potential.” In other words, the offer must be equal to or more than all of your disposable income for the entire year.

Pros

Settle your tax debt for significantly less than you owe.

Cons

Bankruptcy

If a taxpayer has filed for bankruptcy, their federal tax debt can sometimes be discharged entirely.

Pros

May completely discharge you of your tax debt.

Cons

Innocent Spouse Relief

Where married taxpayers file a joint tax return, and there is an understatement of tax due based on mistakes made by one of the spouses, which the other spouse did not know about and could not reasonably have known about, the ignorant spouse may be relieved from liability of the resulting tax debt.

Pros

Completely relieves the innocent spouse of liability for tax debt attributable to the other spouse’s error the spouse seeking relief did not and could not have known about.

Cons

For more information or to find out which collection option is best for your unique situation, please call 301-250-0257.