Life after an IRS audit: What to expect next on the balance owed

by Howard S. Levy, Esq. on December 18, 2011

in Currently Not Collectible, Installment agreements, IRS Audits, Offer in compromise, Tax liens

Making it through an IRS audit is stressful and anxiety ridden, but for many, it is not the end of the road in dealing with the IRS.  Many IRS audits result in balances due.  Here are my responses to great questions from a reader about dealing with IRS collections after the audit.

I just finished an audit covering three years … 08-09-10…and owe the IRS over $100,000.   My questions are:  Will the IRS do a payment plan?  Would they take a lump sum and forgive the balance?  And will a lien be put on my property as part of the payment negotiations?

To begin with, after the IRS concludes the audit, expect a steam of IRS collection notices seeking payment.   These notices are each sent several weeks apart, and bear titles like “Balance Due,” “Urgent,”  and “Final Notice of Intent to Levy.”   The most important of these notices is the Final Notice of Intent to Levy as this notice allows the IRS to start collecting the liability by levy action.   The Final Notice of Intent to Levy also provides important rights to file a request to talk to an IRS settlement officer to solve the liability.  This request is important as it stops the IRS from taking levy action while you negotiate  a solution of the balance due.

Speaking of solutions, the IRS would be likely to take a payment plan from you, but on a balance due of over $100,000 the IRS will require that you provide a financial statement listing your income, living expenses and valuing your property.   This is to help them determine your cash flow for an installment agreement.  Unfortunately, it is usually not as easy as saying “I want to pay $500 month” when you owe $100,000.

And beware:  the IRS has what they call “Collection Financial Standards” – these are living expense allowances the IRS applies to your budget.  For example, the IRS may think your mortgage and utility expenses are too high, and ask you for a payment you cannot afford.   There are solutions to this dilemma – for example, if you can repay the liability in five years, the IRS can allow all your expenses and you can pay what you can afford.  It is also important to know that disclosure of financials can be avoided on balances under $25,000.  If you owe under $25,000,  the IRS will enter into a “Streamlined Installment Agreement” – a simplified process that accepts repayment over five years regardless of how much you make, spend or are worth.

If you choose to provide a financial statement, the IRS can also  determine that you cannot make any payments and are entitled to a finding of economic hardship.  This is also known as “uncollectible” or “currently non collectible.”  In essence, the IRS will not force a payment if it would cause you to be unable to pay basic essentials.   This can  last as long you cannot reasonably afford to make payment.  And there is an end – the IRS has 10 years to collect the amount from your audit.

As to making a lump sum payment to the IRS to settle the debt, this cannot be done through a simple phone call.  Your offer to settle has to be routed through a formal IRS process known as an offer in compromise.   The IRS has to investigate your financials (yes, full disclosure is required) to determine if your offer represents the most they could collect over the 10 years they have to do so.   The process can take at least 6-9 months.  Bear in mind that, despite what you may have heard on TV or the radio, the IRS is more prone to say “no” to overall settlement, preferring instead to collect installment payments or to sit on uncollectible debt.

What is the policy of the IRS as to filing tax liens?  Based on the amount you owe (over $100,000), expect the IRS to file a tax lien against your property.   Your call to set-up an installment agreement will result in a lien being filed as part of finalizing the agreement.  If you owe under $25,000, there are more options to avoid the filing of the lien, but a general rule is that avoidance of the lien is difficult in large balance due cases.   The lien is good for the 10 years the IRS has to collect, and expires when the IRS is out of time to collect.

Life after an IRS audit often involves after the fact complications of dealing with the IRS Collection Division.   In audits that result in money owed,  it is recommended to be proactive and to understand the next step that awaits you – IRS collections – before the audit is over. There is no substitute for preparation.

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