Hi, this is attorney Tony Ramos with a question that I get asked very often from my clients: "How can I pay the IRS less than what I owe?".
Unfortunately, this is a common misunderstanding about reducing IRS tax debt.
Many clients think that you can negotiate with the IRS like you would a businessman. Unfortunately, the IRS doesn't work like a businessman.
Another very common thing that clients will tell me is "If I just offer them 50 cents on the dollar, let's see if they'll take it!".
Another thing that people want to know is if they can just eliminate all the penalties in the interest and just pay the tax. Again, unfortunately, the IRS doesn't work that way as well.
That said, there often are things that can be done.
So what I'm going to do right now is cover seven ways that you might be able to pay less than what you legally owe.
This is not legal advice, make sure you speak to an attorney. But generally speaking, these are the main seven ways you can pay less than what you legally have.
1. Currently not collectible status
(by providing financial information to the to the IRS)
The IRS sometimes will reach the determination that currently you cannot pay anything. So they'll leave you alone for a year, two years. And they examine your tax returns to see if you're making enough money to stop making payments.
Obviously, if you if you start making more, they're going to ask you to pay something but if you're paying less, they'll leave you alone again. And sometimes you can go on for many, many years.
And I'll cover this in a little bit, but the IRS only has 10 years to collect. So during the the time that you're in currently not collectible status, the clock is still running on the IRS.
2. Partial Payment Installment Agreement (PPIA)
"Installment agreement" is another word the IRS uses for payment plan, and similarly to the currently not collectible status, with a PPIA the IRS makes a determination you can't pay your taxes in full.
So you pay what you can afford. And that's why it's called a partial payment installment agreement.
When the 10 year collection period is over, oftentimes in this type of arrangement, you will not be able to pay off your texts in full. That and partial in that as opposed to full pay, you would have to make higher payments.
And also like currently not collectible set as a they review your financial information when you file your tax returns.
If you're making more money, they're going to want you to raise your payments. Conversely, if you're making less money, you can negotiate a lower payment.
You've probably heard advertisement saying you can pay pennies on the dollar and you end up paying a lot less sometimes one penny on the dollar, sometimes 50 cents on the dollar just depends but basically the IRS looks at three things.
When you make an offer and compromise number one, look at the 10 year collection period to see if what you're going to offer them is more than what they think they can get to suring the 10 year period.
Net Value of Assets
Secondly, they look at the net value of your assets, they want you to offer a nice the net value of your assets. So if you own a home, the equity in the home is what you need to offer.
The good thing is if the IRS knocks off 20% off the top, the value of your home so that let's say for example, your home was worth $300,000, the IRS will knock off 60,000. So they're only looking at 240,000. And if you had a loan of 230,000, your net equity would be 10,000. You have to offer that.
Reasonable Living Expenses
And then the third thing you also have to offer in addition to your net equity in your absence is income left after reasonable what what the IRS considers reasonable reasonable living expenses times 12.
So let's say this example you can afford to pay 500 a month times 12. That would be 6000 plus a $10,000 equity in your home. Your offer would have to be at the 16th thousand dollars, it's so you would have to set it 20%.
And then when it's approved usually takes more than six months for approval, you would have five more months to pay the rest. And in some instances, you're going to have the option of instead of paying 12, you paid 24 months. So instead of 6000, it would be 12,000 in addition to the equity in your home, but do it paid over two years in 24 equal payments.
Statue of Limitations
The fourth way that you might be able to pay less of what you legally owe to the IRS is if the clock runs out on the IRS(they only have 10 years to collect). And after that the debt is is written off forgiven. Now there's a few things that could extend the 10 year statute of limitations. For example, if you file bankruptcy, during the time that you're in bankruptcy, the clock stops.
And then 464 months after you get out the clock resumes. If you leave the United States, we live outside the country for more than six months. clock stops.
If you appeal, a threatened Levy, some kind of enforced collection. During the time of the appeal is pending, the clock stops as well.
But some people come that they've been able to avoid the IRS collection efforts for years and there's only two or three years left.
And all they can pay is enough to to reduce a part of the debt. So that's one way that you can legally pay less than what you owe the IRS.
4. Innocent Spouse Relief
Another is called innocent spouse relief. There's three sub sections in the Internal Revenue Code, but basically, if it's not fair for you to pay taxes that your spouse incurred, usually this is when your spouse under reports income and then later gets assessed and additional about or the IRS denies certain deductions that your spouse took.
Well, you need to be able to show you didn't know or didn't have reason to know about the underpayment or the failure to pay the taxes. There's there's a lot more complicated issue and I'll have a separate video on that.
But sometimes you could claim innocent spouse relief, and the total amount of tax remains the same, but it's not yours, it belongs to you, your spouse or your ex spouse.
5. Abatement of Penalties
Abatement is just a word meaning reduction or elimination of penalties.
And the penalties that we're talking about reducing our primary failure file and failure to pay fading. The file incurs a 5% per month penalty of the tax owed up to a total of 25%. And failure to pay. You you would incur half a percent a month also up to 25%. Although they can't exceed more than 5% a month. It says would be a total of 22.5% for the second one.
But these penalties can be reduced in basically two situations before the first one is called first time abatement, the first year that you owe, or the first tax period that you owe money for, so long as you didn't incur a penalty for the three years before that, you're eligible to eliminate the failure to file failure to pay penalty.
6. Reasonable Cause Abatement
And the other way to eliminate penalties is what's called reasonable cause abatement. Something has to have happened to you that was beyond your control like an illness, you got bad tax advice from your CPA or things of that nature, your records got burned in a fire.
But if you're able to do that, this is one way that you could pay less than what you legally owe because not only do tax, penalties and interest also accrue and you will legally be obligated to pay those as well.
7. Chapter 7 Bankruptcy Liquidation
And finally, the seventh way that you might be able to pay less than what you legally owe. Filing chapter seven bankruptcy liquidation. Now in order to be to qualify, we're talking about income tax, not trust fund taxes. For example, if you own a business and you withheld payroll taxes from your employees and didn't pay them, those will not be dischargeable.
But ordinary income tax that was due more than three years ago can be discharged in chapter seven. Now, if the IRS has filed a lien, then the lay would survive bankruptcy. But generally speaking, after after you vote your income tax for three years or more. And so long as they've been assessed 240 days, there are dischargeable in bankruptcy, like innocent spouse related.
I mentioned a while ago, this is a lot more complex topic, but sometimes taxpayers qualify for that. So this information interest you and you'd like to have a free consultation, call (210) 899-5383 or fill out the contact form below and I'll talk to you soon,
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