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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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Those Nasty IRS Letters...What Can I Do?

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You just got a "certified" letter from the IRS (Final Notice of Intent to Levy/ Notice of Federal Tax Lien). You knew this was coming. A big balance due on your 2011 tax return, which you couldn’t pay on April 15. But you sent the return in anyway. You aren’t hiding anything, you just don’t have the money to pay.

But now it seems serious. The letter says your "immediate action is required", or your property will be "levied", "Federal tax liens" will be filed, general mayhem will ensue.

And the letter reminds you about another debt you owe to the IRS, for 2009, which you have been ignoring, hoping it would go away. Fantasizing, perhaps, that the IRS would forget about you, lose you in it’s massive bureaucracy or intentionally shift its attention to bigger debtors, those that owe ten times your debt.

But that’s not really likely to happen. The IRS will not forget about you. You are in the system and, unless you contact them, at some point - maybe sooner, maybe a bit later - you will receive an even more threatening notice - "Urgent. Contact us now. Your property will be seized to satisfy your IRS debt".

What can you do? What should you do?

Our first suggestion is to be proactive. Take control of the situation. Review your options, and contact the IRS - open the lines of communication. I always tell my students that the best approach to dealing with the IRS is to (1) intervene early in the process; (2) tell the IRS specifically what the problem is; (3) describe in detail how you will solve the problem; and (4) explain why it will not happen again.

A simple approach, but how do you "solve" the problem? In other words, what are your options?

There are really only five options for dealing with the IRS when you owe it money, don’t dispute the amount of the debt, and don’t have the available cash (or assets to sell) to pay the debt now. Here are the five:

  1. Borrow the money from a third party - Do you have a family member or friend who might be willing to loan you the money to pay-off the IRS? Can you borrow money from a bank, perhaps obtaining some type of equity loan that might, ironically, provide a tax benefit to you? Its just a shifting of the debt to another creditor, of course, but most every creditor (other than Tony Soprano, I suppose) is preferable to the IRS.
  2. Borrow the money from the IRS - The IRS itself will frequently be satisfied placing you into an installment agreement. Although there are some conditions and qualifying criteria, if you owe less than $50,000, you can generally obtain up to 72 months to pay off the debt in full. And there are other types of installment agreements (partial installments, graduated installments) that might be useful in a particular situation, though that discussion is beyond the scope of this article.
  3. Currently Not Collectible status - If you are truly suffering a temporary or long-term economic hardship, you might be able to convince the IRS to place your account in an inactive status, which means it will not forcibly take any of your property to satisfy the debt owing (though in almost all situations the IRS will still file a Notice of Federal Tax Lien against you). However, you will have to document your hardship, and disclose your financial circumstances with great specificity.
  4. Offer in Compromise - This is the program that allows you to "settle with the IRS for pennies on a dollar". Though historically it has been extremely difficult for taxpayers to actually get one of these offers accepted, recent IRS policy changes have liberalized the program and made it considerably more flexible, resulting in more taxpayers having their tax debts partially or substantially written off. See our Tax Tip number 2 on this subject.
  5. Bankruptcy. Under some circumstances, IRS tax debts are dischargeable in bankruptcy proceedings. Nevertheless, there are consequences to a bankruptcy that demand careful consideration before undertaking this option.

Most importantly, we suggest you consider all options carefully, and determine which one suits your unique situation. The IRS will not guide you or choose for you - its overriding, primary mission is to collect all the money owing, and collect it now.

Please be aware that the recommendations, suggestions and guidance provided on this website is informational only, and is not intended as, nor does it constitute, legal advice to be relied upon for your particular situation. Nothing written on this site should be a substitute for the specific advice of a competent professional.

Please also note that all original content on this website is solely the property of The Short Chicago Tax Lawyer, Ltd., and copyright protection is hereby claimed for all such content, including the domain names theshortchicagotaxlawyer.com and thecktaxclinic.com.

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