**This article is part of a larger article series titled, The 941 Payroll Tax Resolution Process. There is a specific sequential order to this series, so we highly recommend that you start at the beginning.
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There are a few different tax resolution options (or pathways) to consider. Most of the time, the financial analysis will dictate which option you qualify for. Occasionally, you can join one or more of these options together to get a better resolution outcome. Just know that 99 out of 100 tax resolution cases will be resolved with one pathway.
- 1 – Full pay the tax liability
- 2 – Filing unfiled tax returns and replacing substitute for returns
- 3 – Installment Agreements
- 4 – Currently not collectible status
- 5 – Offer in compromise
- 6 – Discharging taxes in bankruptcy
- 7 – Expiration of the CSED
Let’s talk through each of these.
Pathway 1 – Full Pay the Tax Liability
The first tax resolution option is not a popular one, but can be used. If you can do a one-off payment and full pay the tax debt, you can choose to do so. If you can full pay the liability, it is likely the IRS will force you to do so.
There could be some prudence to just paying it yourself before you go through this entire process.
Pathway 2 – Filing Unfiled Tax Returns and Replacing Substitute for Returns
The second tax resolution option is filing unfiled tax resturns are replacing SFRs. It is relatively common to have unfiled back tax returns filed on your behalf by the IRS. This is called a Substitute for Return (SFR). Just like it sounds, the IRS is substituting the return you should have filed, for a return of their own.
When the IRS creates SFR’s, they use information they have on the tax account. They will file a return on behalf of the business assuming a worst-case scenario (no deductions, exemptions, etc.) This resolution pathway can often be joined with others. After pulling your account transcripts, you may find that replacing SFR’s will reduce the tax liability; possibly even removing it altogether.
You will likely still have penalties and interest regarding not filing. But it will be less than the amount the IRS was banging on your door for.
At that point, you can full pay (option 1) or go through additional tax resolution pathways as needed.
Pathway 3 – Installment Agreements
Roughly 75% of all business tax debtors will be placed on an installment agreement. This is the third tax resolution option. Installment agreements are the predominant resolution pathway, not the OIC or CNC programs.
We recognize that might be shocking, given that so many companies out there have “Pennies on the Dollar” advertisements. Only 1/3 of 1% actually qualify on the 1040-individual side, and even less qualify on the business side.
Most IRS tax debt cases are resolved through an appropriate payment plan. With tax debts, this equates to a few different Installment Agreements.
- In-Business Trust Fund Express Installment Agreement (IBTF-E)
- In-Business Trust Fund Installment Agreement
- Streamlined Installment Agreement
- Regular Installment Agreement
- Partial Payment Installment Agreement
There are distinguishing factors with each of these installment agreements. Here is a brief overview of each:
1. In-Business Trust Fund Express Installment Agreement (IBTF-E)
This is the streamlined option for businesses still in service to pay their payroll taxes. It is the best option and the way to go if you qualify. You will qualify only if you have not let the problem linger for a long time.
To qualify, the total tax, penalty, and interest (TPI) cannot exceed $25,000. The entire tax liability needs to be paid within 24 months. The last payment also must be made prior to the expiration of the CSED clock.
There are several benefits with this option:
- A financial disclosure through Form 433-B is not required.
- The lack of required lien filing.
- Lastly, a Revenue Officer is not required to make a field visit to verify business assets.
This is a great option for those that have not allowed their tax debt to linger for a long time.
2. In-Business Trust Fund Installment Agreement
This is the non-express version. It is the full installment agreement when businesses are in service and do not qualify for the Express option. They typically have tax debts in excess of $25,000 or they cannot pay the liability down in 24-month payment terms.
The downsides to this installment agreement, compared to the Express option, is:
- A financial disclosure has to be submitted
- The Revenue Officer must have a field visit to verify assets
- A lien will be filed against business assets and property
- And asset can be required to be disposed of to pay the debt
3. Streamlined Installment Agreement
This is an option if the business is closed or closing. There is a limitation on the amount of tax debt. The agreement is in the name and EIN of the business, but the business owner is really paying for it.
4. Regular Installment Agreement
This option has no limitation on the amount of tax liability. However, like the streamlined option, the business needs to be closed or is closing. As most of you reading this are mainly in-business type companies, we won’t spend time on this.
5. Partial Payment Installment Agreement
This is an agreement that allows the business to pay something to the IRS. In other words, they know they won’t get the full amount, but they still require the business to pay something.
This can include any amount while they are in business. You will be required to provide full financials and the CSED will be extended. If you qualify for this option, it is often worth considering the OIC program instead.
A Word About Pending Installment Agreements
In order to active an installment agreement, you must:
- File all 941 returns (not just the last 6 years), and
- Start making your regular Federal Tax Deposits like a good little taxpayer.
From there, you can request an installment agreement by mail, fax, or voicemail. You need to specifically request:
- The installment agreement type
- Include all tax types and periods
- And be ready to provide necessary financials
Option 4 – Currently Not Collectible Status
Next, the fourth tax resolution option is Currently Not Collectible Status. If there are no assets to liquidate, and no income above business expenses, you might qualify for CNC status.
If you are placed in CNC status, the CSED does not get stopped. The idea with CNC is that the CSED expires while under this status. The CSED is the last date for the IRS to collect from you. When that occurs, the liability disappears, and the business won’t owe a dime to the IRS.
There are a few tradeoffs, namely that
- The IRS will file a tax lien against the business
- There will be a mandatory financial analysis follow up every 18-24 months
- The Trust Fund Recovery Penalty assessment will be filed against someone (or multiple people)
Option 5 – The Offer in Compromise
The fifth tax resolution option is the OIC. Whenever you see “pennies on the dollar” advertising, it is referring to an Offer in Compromise. It is possible for operation businesses to compromise their tax debts via the Offer in Compromise pathway. However, many firms advertise the OIC program as the best option. Most businesses will not even qualify for it.
The IRS will only accept this option if it is in the IRS’ best interest to collect the tax liability.
OIC Pros and Cons
If you do qualify, there are some amazing benefits, namely that:
- Your tax debts are settled for less that what you owe
- An elimination of penalties and interest
- No enforce collections
- Case closure
- Lien removal upon acceptance
The downsides are the large amount of cash due at once (most often), an application fee, full financial disclosure is required, the CSED is extended, and you’ll have closer IRS scrutiny for five years after acceptance.
Most people are eligible based on a few specific scenarios:
- Doubt as to Collectability with Special Circumstances. Think economic hardship. The inability to keep the business going in a lot of respects
- Doubt as to Liability. Meaning you have a genuine dispute as to the existence of amount of the correct tax debt under the law.
- Effective Tax Administration. These are special situations. Its really only used if collection would undermine public confidence in the IRS. Meaning that the tax laws are being administered in an unfair and unequitable manner.
If you are eligible, the requirements of having your OIC accepted are as follows:
- All 941 tax returns must be filed
- The company cannot be in bankruptcy
- They must be making current Federal Tax Deposit payments
- Must not be able to pay in full or through an installment agreement
- Trust Fund must be paid or TFRP assessment made against an individual
Yes, someone needs to be liable and assessed the Trust Fund Recovery Penalty to be eligible. The IRS won’t even process the Offer unless someone has been assessed this penalty.
The business can file the OIC and pay some of the liability, but the Trust Fund must still be paid. Someone will still be on the hook for it.
Option 6 – Discharging Taxes in Bankruptcy
Discharging taxes in bankruptcy is another tax resolution option. Contrary to popular belief, it is possible to discharge tax debts in bankruptcy. You read that correctly. Yes, some federal, state, and local income taxes can be discharged in Chapter 7, Chapter 13, and Chapter 11 bankruptcy.
Better yet, even the penalties and interest attached to those income tax debts can also be dischargeable as well. But determining which back taxes are dischargeable is a highly complex process.
We are not bankruptcy attorney around here, so we won’t be diving deep into this option. But there are a few core principles that you should be aware of:
- Trust fund taxes (the amounts that your employees had withheld) will not be discharged. You will still be liable for this portion through the Trust Fund Recovery Penalty
- The employer’s portion of the payroll tax (social security and Medicare), however, is dischargeable under certain situations
- Other business income taxes may be dischargeable but seek a bankruptcy attorney for specific help.
Option 7 – Expiration of the Collection Statute
Finally, the last tax resolution option is the expiration of the collection statute (CSED clock). The IRS only has a limited time during which to collect back taxes from you. This time period starts after an assessment has been made and ends 10 years later.
It should be noted that this CSED clock runs for each period, in this case each quarter. But the expiration of the CSED is an option. If the clock runs out, then the liability drops off entirely. If you:
- Filed proper return,
- An assessment was then made,
But then collection was never enforced and you are nearing that CSED clock expiring, this is an option for you.
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