Distressed Businesses, the Unemployed, and Others Experiencing Financial Hardship May Greatly Benefit if Action is Taken
Although the pandemic and related financial downturns have put many individuals and businesses on the brink of financial disaster, this may present an opportunity for those with long-standing tax issues. For those that have been financially impacted by this crisis, this may be the appropriate time to affirmatively try to resolve delinquent tax debts through available collection alternatives such as installment agreements and Offers in Compromise.
The People First Initiative.
On March 25, 2020, the Internal Revenue Service (“IRS”) unveiled a major administrative response to the COVID-19 pandemic: the People First Initiative. Pursuant to this pronouncement, “the IRS is pursuing unprecedent actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and others less fortunate.” In that vein, the IRS has taken the following important steps for those with delinquent taxes:[1]
- Existing Installment Agreements. For those with an existing installment agreement, payments due between April 1, 2020 and July 15, 2020 are suspended.
- Offers in Compromise (OIC). The IRS is allowing taxpayers until July 15 to provide financial information in support of a pending OIC and will not close any pending request until then. Taxpayers have the option of suspending OIC payments during this period.
- Field Collection Activities. Liens and levies are suspended until July 15, 2020 with the exception of “high-income non-filers” and “other similar activities.”
- Automated Liens and Levies. New automatic, systemic liens and levies will be suspended until July 15, 2020.
While these actions will help businesses and individuals with tax issues for the next three months, a proactive approach may yield even better results for tax resolution in the long-term. That is, since the IRS has effectively guaranteed that no enforced action will occur for at least three months in most situations, taxpayers have time and can use this opportunity to plan a resolution. Particularly for those who have already had (or will have) their income negatively affected during this period, they should consider seeking an installment agreement or Offer in Compromise (“collection alternatives”).[2]
COVID-19 Impacts Collection Potential.
When evaluating collection alternatives for those with outstanding taxes, the IRS generally relies on a determination of collection potential. That determination is based upon a review of a taxpayer’s equity in assets, a taxpayer’s income, and a taxpayer’s allowable expenses. For many taxpayers affected by the pandemic, they have already substantially exhausted their equity in assets (e.g., cash, financial accounts, etc.) and have not experienced any reduction in allowable expenses. On the other hand, their income may have been dramatically impacted. For wage earners, the IRS will generally request wage statements or similar information from the three months prior to an application. Accordingly, for an installment agreement or Offer in Compromise requested on July 1, 2020, the IRS will generally only request income information from April 1, 2020 through June 30, 2020. For those taxpayers with outstanding taxes, in light of the lack of lien or levy activity, it may financially benefit them to pay other necessary expenses and wait until near the end of this period to show a full three-month period of financial hardship.
Reduction in Installment Agreement Payments.
If taxpayers have been laid off, experienced a reduction in hours, had a revenue stream significantly reduced, or otherwise, this may allow for a more beneficial installment agreement or Offer in Compromise. For example, in Maryland, under IRS guidelines, the approximate amount of “allowable living expenses” for a family of four is $6,500/month.[3] If the sole wage-earner in a household, previously earning $100,000/year, was laid off in late March and has only received available unemployment of approximately $1,000/week,[4] their net disposable monthly income will have declined by approximately $3,000 to $4,000. Whereas they may have been required to pay $2,000 or more per month on a prior IRS installment agreement, they may now qualify for a much lesser monthly payment amount or even no payment at all.[5] A similar analysis would be performed for business taxpayers experiencing a significant drop in gross receipts.
Improved Prospects for Offers in Compromise.
Perhaps even more beneficial, as a result of financial difficulties, many taxpayers may now for the first time qualify for an Offer in Compromise. Others may qualify for a substantially reduced offer amount in an Offer in Compromise. This collection alternative could be even more advantageous than the installment agreement as it would completely resolve the underlying liabilities. For example, revisiting the prior example, if a taxpayer owed $100,000 in taxes to the IRS and their only asset with any equity was a bank account containing $1,000, that taxpayer may be able to resolve the liability for less than $100 as a result of the current financial hardship. (Prior to the reduction in income, the taxpayer may not even qualify to submit an Offer in Compromise as they may have been able to fully pay the liability, pursuant to IRS guidelines.) The resolution of these types of tax issues, using these strategies, could have a substantial long-term benefit to many taxpayers.
Careful Planning, Documentation, and Vigilance Required.
While the benefits to be gained from proactively addressing these issues during a financial hardship are clear, it is important that taxpayers not tread lightly. As with almost all dealings with the IRS, documentation and substantiation is paramount. Since these applications may not be processed until months after they are submitted, it is likely that some impacted taxpayers will have their income return to normal by the time the IRS reviews their application. If all required information is not included or the application is otherwise incomplete, the IRS may have grounds to deny the request or to require additional, updated income information. Where income has increased to pre-hardship levels, taxpayers required to provide this additional information will not reap the maximum benefits of this strategy.
Further, while the IRS has clear guidelines in place regarding financial analysis and some additional leniency should be expected as a result of the pandemic, many revenue officers and offer examiners at the IRS are unsympathetic to taxpayers. Other IRS personnel may not be aware of or strictly follow established guidance in all circumstances. For those navigating the path alone, missteps could cause for a great opportunity to be missed or, worse yet, to backfire completely. For these reasons and more, taxpayers with significant tax issues should consider seeking the assistance of a professional when dealing with the IRS.
In conclusion, for those with significant lingering federal tax liabilities, the negative financial impacts of the COVID-19 pandemic may present opportunities for tax resolution. Those considering such a strategy should carefully review their current and future financial situations, ensure that all procedural requirements for a complete request for a collection alternative are satisfied, and be prepared to defend their positions when reviewed by IRS personnel.
These descriptions are intended for informational purposes only and should not be taken as legal advice on any particular set of facts or circumstances. Rosenberg Martin Greenberg, LLP is experienced in all aspects of federal and state tax laws, legislative developments concerning the CARES Act, addressing prior compliance issues, and more. For questions on this article, please contact info@rosenbergmartin.com.
[1] These are only some of the changes detailed in the People First Initiative. For a full listing of these changes, please review Internal Revenue Service Announces “People First Initiative” in the Wake of COVID-19.
[2] Even if a taxpayer is not granted an installment agreement or Offer in Compromise, the IRS is prevented from taking any enforced collection while its consideration is pending.
[3] This is an approximate total. The actual amount will vary depending upon a number of factors and a taxpayer’s ability to substantiate necessary expenses. More information can be found at the IRS’ Collection Financial Standards webpage.
[4] This amount approximates the maximum unemployment insurance offered in Maryland combined with special temporary unemployment benefits offered by the CARES Act.
[5] In this scenario, it is highly likely that the taxpayer would qualify for “Currently Not Collectible” status. Although subject to annual income reviews, the IRS generally does not take collection actions while such status applies.