In February, the IRS issued new rules to help soften the blow for taxpayers who can’t afford to pay their taxes when owed. These new rules include increasing the threshold at which the IRS files a tax lien and expanding the installment and offers in compromise programs to allow more taxpayers to qualify.

Despite the changes, taxpayers still face a host of consequences for not paying taxes when owed and need to understand the options available to address their tax debt.

If a taxpayer does not file a tax return and pay the taxes owed when due, the IRS can take several steps, including:

  • Failure-to-file penalty.
  • Substitute tax return.
  • Levies and liens.

Under the new IRS procedures, liens will not be filed until a taxpayer owes more than $10,000 in taxes (up from $5,000). Additionally, the new rules make it easier for a taxpayer to have a tax lien withdrawn from their record after paying their tax debt. However, they need to make a formal request to the IRS for the withdrawal. Also, if the taxpayer enters into a direct debit installment agreement with the IRS, they can have the tax lien withdrawn while they are paying off the debt.

Steps taxpayers can take to help avoid a tax lien include either finding a way to pay the taxes owed outright or working with the IRS to arrange a payment schedule and possibly agree to reduce the amount owed.

  • Borrow, liquidate assets or charge to pay the debt. Taxpayers who owe and can’t pay their entire tax bill when it’s due, but can pay the full amount within 120 days, can ask the IRS for a short-term administrative extension. Taxpayers who need more time have just a few options: They can try to secure a bank loan, such as a home equity loan, cash out a retirement account or use their credit card. Penalties for withdrawing from a retirement account may be more substantial. However, taxpayers may also want to explore this option with their tax advisor if other resources are unavailable.
  • Enter into an installment agreement with the IRS. The IRS is required to accept installment payments if a taxpayer has a good filing and payment record over the past five years, the amount owed is not more than $10,000 and it can be paid off in full within three years. Under the new rules, the agency also is allowing small businesses to enter into “streamlined” installment agreements if their debt is below $25,000 (up from $10,000) and they agree to pay it off in 24 months. The new streamlined installment agreement is available to small businesses that file as an individual or as a business. To participate, the small business must enroll in a direct debit installment agreement.
  • Reach an offer in compromise with the IRS. In some instances, the IRS may accept less than the full amount due. This typically occurs if the taxpayer can show that the full tax debt could never be collected or they have a dispute with the IRS as to how much is owed, but neither party wants to enter into a legal battle to resolve the issue.

Under the new rules issued in February, more people may be eligible to participate in offers in compromise. Taxpayers with incomes of up to $100,000 (up from $50,000) and who have a tax debt below $50,000 (up from $25,000) can now request an offer in compromise from the IRS.

There’s a $150 fee charged for offers in compromise. Certain low-income individuals can ask for a waiver. Additionally, an initial non-refundable payment must be made with an offer in compromise.

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