As the IRS steps up enforcement against delinquent wealthy taxpayers, advisors are quick to note that the federal government offers ways for clients to pay off tax debts, ranging from payment plans to having debt declared temporarily uncollectible.
The key for clients is choosing the right option, they say.
“We’re seeing the largest uptick in wealthy people’s inability to pay their taxes since the global financial crisis,” says Chris Mays, a partner at Armanino in El Segundo, Calif.
Steve Parrish, adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services in King of Prussia, Pa., says there are many reasons wealthy people rack up large tax bills. “Tax liabilities arise because of failed attempts to shelter assets, buying into abusive tax shelters, incurring accuracy-related penalties, surtaxes like the 25% penalty for failing to take a required minimum distribution and so on,” he says.
The IRS generally has 10 years to collect taxes it has assessed, along with interest and penalties. For those who can’t pay the amount in full, the agency offers a short-term payment plan of 180 days to pay the bill in full, which is for people who owe less than $100,000 in tax, penalties and interest. The agency also offers a long-term payment plan of monthly installments over up to six years for those who owe less than $50,000 in total. The IRS requires direct debits for balances between $25,000 and $50,000.
“The IRS is not going to just take your word for it that you can’t pay,” Mays said. “Debts greater than $1 million will be assigned to a collection officer who will work with the taxpayer to establish the appropriate payment approach and has all enforcement tools available, up to and including liens and levies and U.S. passport suspensions.
“Our recent experience on large debts is that the IRS is very aggressive on liens and levies and unwilling to negotiate a payment plan unless there’s a reasonable plan to pay off the debt and substantial proof that the plan is achievable,” Mays said.
The IRS sometimes offers taxpayers an “offer in compromise,” or OIC, which allows them to settle with the agency for less than the full amount owed. The agency says on its website that this avenue is reserved for situations where “the amount you offer represents the most we can expect to collect within a reasonable period of time.”
Taxpayers can also apply to have their tax debt be stamped by the agency as “currently not collectible” in situations where they are absolutely unable to repay the debt and maintain their basic living expenses.
“This involves penalties, and your debt doesn’t go away. But at least the IRS won’t be trying to go after you currently,” Parrish says.
Each repayment option offers pluses and minuses, and each can be progressively harder to get and require more and more detailed financial information, advisors note.
A “currently-not-collectible” status, for example, is reserved for extreme hardship cases.
“For large debts, the taxpayer will have to provide substantial and detailed proof of ability or inability to pay, including lists of all assets and liabilities, and provide proof of monthly income and expenses,” Mays says. “There’s usually a fee for setting up a payment plan.”
OICs are also only available in limited circumstances. “An OIC may be available when it can be established that the full debt can’t be paid off in a ‘reasonable amount of time,’” Mays says. “The IRS will ask for detailed financial information [and] may still file a federal tax lien. And the collection statute of limitations may be extended.”
Wealthy clients tend to be unaware of these potential answers to tax debt “unless they have been through some challenges with the IRS,” Mays adds. “And if they had an issue with the IRS, our recent experience is that the agency is less likely to provide leniency on payment terms. They’re more favorable to first-time offenders.”