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What is a Formal Resolution With The IRS?

October 30, 2015

When taxpayers owe the IRS more money than they can afford to pay, a formal resolution may be needed to prevent collection actions.

What’s The Difference Between an Informal and Formal Resolution?

There are two types of resolutions: informal and formal. In an informal agreement, the taxpayer works to send payments to the IRS to satisfy a debt. In a formal agreement, the taxpayer and the IRS enter into a written agreement where both agree that the taxpayer will pay a certain amount during a specific time period to pay the full balance.

IRS Formal Resolution Requirements

A formal resolution with the IRS is always a written agreement. Before reaching a formal resolution, the taxpayer should know and fully understand the requirements of the agreement. For example, before an Installment Agreement is agreed upon, the taxpayer must ensure that they can pay the minimum installment amount every month during the entire length of the agreement. If the agreement is to pay $3,500 each month for a year, the taxpayer cannot pay less than $3,500 in a month, but they may pay more, if desired.

Defaulting on an agreement can result in a penalty and termination of the agreement. To get the agreement reinstated, the taxpayer will need to provide a valid reason for the non-compliance to the IRS.

IRS Payment Options

There are various installment agreement and repayment options available to taxpayers, including:

Streamlined Installment Agreements

A formal resolution can be achieved through various IRS payment options such as installment agreements, an Offer in Compromise, and Currently Not Collectible (CNC) status. For tax debts of $50,000 or less, where the taxpayer qualifies for a Streamlined Installment Agreement, the taxpayer is not required to provide the IRS with a financial statement (Form 433-F). The IRS uses a financial statement to analyze the taxpayer’s financial situation. Another advantage of a streamlined installment agreement is that the IRS does not place a federal tax lien on the taxpayer to ensure payment.

Offer in Compromise

For taxpayers with limited ability to pay, an appropriate payment option may be an Offer in Compromise. This plan allows a reduction in tax debt to an amount that the taxpayer can afford. It is a resolution option only open to those with limited financial capacity. The IRS analyzes the financial ability of the taxpayer, including any assets or property (house, car, boat, etc.) owned before reducing the tax debt.

Currently Not Collectible

Another kind of formal resolution is Currently Not Collectible status. This is the designation given to a taxpayer’s case after the IRS finds that they cannot collect any amount of back taxes. In order to qualify, the financial situation of the taxpayer must be so limited that any collection action would create a financial crisis, preventing them from meeting basic living expenses.

A formal agreement with the IRS is definitive and protects the taxpayer from aggressive collection methods of the IRS such as liens and levies. Defaulting on the agreement or incurring a new tax debt will, however, invalidate the plan. It’s advisable to speak with a licensed tax professional before committing to any IRS plan. Having a representative with experience and expertise in handling tax debt cases will ensure a speedy and successful resolution.