A significant IRS (see here for details) balance doesn’t follow the same process as a typical bill. This write-up offers curious individuals a window into what unfolds and in what order—and how all of this information is converted to realistic tax debt negotiation strategies when assisted by individuals such as and including firms such as Cumberland Law Group.
The IRS Approach to Large Tax Debts
When an amount exceeds certain thresholds, the IRS typically turns to a Revenue Officer rather than keeping it automated collections, like let’s say the IRS officer first priority is “current compliance,” which means that all tax filings, such as for a tax return, taxes owed, file taxes, file the required estimated payment for the current year, and so on.
In order to get to ability to pay option or to put a pause on a levy or wage garnishment, the tax pay will need to fulfill current filing and payment for the current year, and then we will get to working on the, maybe, and some collection/levy options. They look at the Forms 433 (for individuals or business), where they look for assets, whose income, expenses that are necessary and all that follows looking forward to determine if the taxpayer qualifies for IRS installment agreement, or a partial pay or in rare cases a lump sum settlement.
What Factors Influence Negotiation Outcomes?
Behind the curtain, the IRS is calculating “reasonable collection potential” (RCP) or what they think about possibility before the collection statute runs out. Many taxpayers start looking for local counsel; many look for tax attorney Atlanta, who can help to understand financial standards and compile records, so they are what the IRS is looking for.
- Verified monthly earnings in relation to “allowable” living expenses based on national and local living standards.
- Aspects of equity in assets (cash, investments, vehicles, real estate) and how quickly the taxpayer can liquidate without undue hardship.
- Filing and payment history (clean or erratic compliance in the current year and how close the collection statute is to running).
- Business viability for owners (payroll, vendor contracts) since a going concern will be a rationale for more advantageous terms than for an entity winding down.
- Risk indicators (like prior defaulted plans) delegate the request for stricter terms or additional monitoring.
Are Penalties and Interest Negotiable?
Interest is largely statutory and continues to accrue until a debt is paid off. Penalties are subject to negotiation. The IRS has first-time penalty abatement for qualifying taxpayers and may grant penalty abatement for “reasonable cause” (serious illness, natural disaster, or demonstrable reliance on a professional) with adequate documentation.
Follow https://www.irs.gov/payments/administrative-penalty-relief to learn more.
In settlement negotiations, an offer in compromise can combine the total balance with any penalties that are attributed to the offer based on the reasonable collection protocol (RCP). If penalties are simply administratively removed, the penalties will drop, as will any associated interest. Interest on the tax itself will generally remain.
Case Examples of Successful Negotiations
Outcomes will vary with facts, but there are always patterns in high-balance cases. The following anonymized case studies demonstrate how policy and math is translated into outcomes and how the combination of timing, documentation, and compliance results in the best pathway.
- Seven-Figure Self-Employed Liability → Partial-Payment Plan: A documented track record of sporadic income versus other business-related expenses led to the IRS agreeing to a partial-payment IRS installment payment plan for a seasonal cash flow. The plan called for the IRS to do periodic financial reviews rather than the taxpayer to liquidate assets for a full pay-off.
- Equity-Rich Cash-Poor Retiree → Offer in Compromise: A home with limited accessible equity, minimum pensions, and significant medical expenses resulted in an acceptable offer in compromise calculated at low RCP. Adequate backup for expenses and demonstrating constraints of the property outweighed the headline asset value in miscellaneous information.
- Payroll Tax Exposure → Penalty Relief + Term Plan: A small employer who corrected payroll processes and was in compliance with making current payroll tax deposits obtained specific penalty abatement for a finite time period and subsequently was offered a structured term agreement. Reporting at the first indication of delinquency and maintaining compliance going forward contributed to these results.
What Taxpayers Should Expect Afterward
Even after an agreement is reached for either a plan or a settlement with the IRS, reasonable expectations are important, as the IRS continues to watch. Missing estimated payments, filing late or avoiding filing, and accruing any new balances will lead to agreement default or enforcement collection actions.
Agreed-upon plans will conduct periodic reviews, and income changes will result in increased payments. For offers, rules for after the agreement has been accepted will take into effect, offers require strict ongoing compliance for filing and payment for five years after acceptance, and just one instance of missing compliance will reinstate the full original liability balance.
Taxpayers should be aware of all consequences of federal tax liens remaining in effect until the liability is fully satisfied or released and rely on accruing continuing interest until every dollar has cleared.
