Resolving tax liabilities in an age of aggressive collecting

By Jessica L. McConnell

June 4, 2010

Individuals and businesses are not the only ones struggling financially in this economy. The taxing authorities are struggling as well.

In an effort to offset budget cuts and decreased revenue, the Internal Revenue Service and the Oregon Department of Revenue have dramatically increased their collection efforts against taxpayers. Both agencies have hired additional employees and expanded their collection workforces.

What, for some, used to be a prolonged game of cat and mouse with the IRS and ODR, is now a fast-paced and, at times, aggressive collection battle. The time between when a taxpayer files a tax return with an amount owing and when the taxing authorities begin forced collection efforts such as filing tax liens and commencing levy actions, has shortened dramatically during the last two years.

The IRS seems a bit more aggressive than the ODR. A few years ago, it was common for a business or individual taxpayer, often with the assistance of legal counsel, to be safe from forced collection efforts for more than a year after filing federal tax returns and accumulating significant tax liabilities. Now, a taxpayer, regardless of assistance from legal counsel, may expect the IRS to file a federal tax lien or issue a final notice of intent to levy within four months from the time the taxpayer files tax returns showing an unpaid balance.

While historically expeditious in filing warrants (the ODR’s tax lien), that agency too, appears to have accelerated its collection efforts. Before the ODR felt the effects of a depressed economy, taxpayers commonly went for seven months to a year without the ODR filing a distraint warrant or commencing levy actions. Now, the taxpayer may have as little as two months from the time the ODR processes a tax return until the agency files a distraint warrant and commences levy actions such as garnishing the taxpayer’s wages or seizing the taxpayer’s bank accounts.

Note: Taxpayers who participated in the Oregon Tax Amnesty Program and subsequently defaulted on their payment plan may have an extended period of time before the ODR ramps up its collection efforts, due to the high volume of participation in the program.

With the agencies’ accelerated collection efforts, taxpayers with outstanding tax liabilities should know their options and plan ahead. The following are four common ways to manage an outstanding tax liability.

Uncollectible status. If a taxpayer can’t pay anything toward the tax liability due to minimal income or unemployment, and the taxpayer lives at or below the IRS’s national and local living standards, the taxpayer may request uncollectible status.

This means that the IRS or ODR will place a collection hold on the taxpayer’s tax accounts and cease collection efforts for a specified period of time, usually one to two years. IRS national and local living standards can be found on the IRS’s website.

Installment agreement. If a taxpayer can pay the full liability over time, the taxpayer may sign an installment agreement with the IRS or ODR. The IRS has a ten-year statute of limitations on collection; the ODR has none.

This results in the IRS generally requiring shorter installment plans than the ODR. As a rule of thumb, the IRS requires full payment in two to three years, depending on the amount of the liability.

Both the IRS and the ODR use the IRS’s national and local living standards when evaluating the taxpayer’s ability to make monthly payments.

Settlement offer. If the taxpayer will never be able to pay the entire tax liability, but can pay a portion of the tax liability in a lump sum, the taxpayer may submit an “offer in compromise” to the IRS or a settlement offer to the ODR.

Such offers are contractual agreements between the agency and the taxpayer. The taxpayer will be deemed to have fully satisfied the entire tax liability if the taxpayer pays the offered amount, usually in a lump sum within two years or less, and complies with other nonmonetary requirements such as remaining in tax compliance for three to five years following the offer.

The amount of such offers is determined by a set formula using the taxpayer’s equity in assets and monthly net disposable income according to the IRS’s national and local living standards.

Bankruptcy. Contrary to popular belief, taxpayers may use bankruptcy as a way to absolve themselves of certain types of tax debt. Absent fraud or abuse, a taxpayer may discharge income taxes in bankruptcy after a requisite period of time has passed since the taxpayer filed tax returns. The time period ranges from 240 days after the assessment of the tax to three years after the due date of the tax return.

Each tax year is treated as a separate liability with its own time frame for determining dischargeability in bankruptcy. Not all taxes are dischargeable. Whether a tax is dischargeable depends on the type of tax and the circumstances of each case.

Despite the taxing authorities’ increased collection efforts, the taxpayer still has options for managing and resolving an outstanding tax liability.

Jessica L. McConnell is an attorney at law firm Greene & Markley, where she concentrates her practice in federal, state and local tax controversies. She can be reached at 503-295-2668 or jessica.shoup@greenemarkley.com.

This article appeared in the Portland Business Journal on June 4, 2010.