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The recent economic malaise afflicting the world, including the United States and its citizens, has caused many an individual and business to miss and fall behind on personal and entity financial obligations. It could be a mortgage, rent, utility payments, insurance, vendor statements, credit card bills, car payments, medical bills, domestic obligations, etc.  Everyone’s situation is different. But, there is one common creditor group every individual and business faces – the Taxing Authorities, a/k/a, the revenue departments of the federal, state and local governments.

A Taxing Reality

The Taxing Authorities have seen a marked increase in unpaid taxes, penalties, and interest (“Tax Debt”) over the past three years. When money is tight, people and businesses (“Taxpayers”) have a tendency to give priority to day to day expenses over Tax Debt. However, no other creditor in the country has the ability to make life miserable like the Taxing Authorities.  They are afforded a basic “expressway” to your assets unavailable to the general public. For that reason, Taxpayers indebted to the Taxing Authorities must deal with the situation or risk an accelerated loss of assets.

Nowadays you cannot spend ten minutes watching television, listening to the radio, reading periodicals, or surfing the internet without encountering a solemn yet aggressive advertisement for a business dedicated to relieving tax burdens. That is a good reflection of an unfortunate sign of the times – a lot of Taxpayers owe past-due tax. It is further represented by the number of folks I and my area colleagues have heard from seeking help with outstanding taxes. Yet, despite this “wealth” of tax relief resources out there for Taxpayers, there is a noticeable absence of information about one of the most important factors involved in settling a Tax Debt.

Ways to Approach Tax Debt

Generally speaking, there are three possible ways to handle Tax Debt: (1) pay it in full in one lump sum; (2) pay it in full over a period of time; or (3) pay a reduced amount in one lump sum or over a period of time.Realistically, it goes without saying that a one time lump sum payment in full is not an option for most Taxpayers. The latter two options are more commonly referred to as installment plan agreement and an offer in compromise. Each of these is a product of state and federal statutes and regulations (“the Tax Codes”). They are intended to, for the most part, benefit both the Taxpayer and the Taxing Authority. As examples, during the process (1) the Taxpayer generally obtains relief from the Taxing Authority’s collection efforts, and (2) the Taxing Authority receives payments towards the Tax Debt it might otherwise not receive without significant efforts.

Despite the suggestions of the late night television tax relief experts, not everyone qualifies for the benefits of either an installment plan agreement or an offer in compromise. There are specific requirements prescribed by law and the policy and procedures of the Taxing Authorities. It is a difficult and frequently lengthy procedure. That said, the most common problem Taxpayers encounter that derails the application process or terminates an accepted installment plan agreement or offer in compromise is neither the application itself nor the reasons the Taxpayer fell behind. It is future compliance with the Tax Codes.

An often unknown, forgotten and/or ignored requirement absolutely essential to an application for an installment plan agreement or an offer in compromise is abiding by all future tax obligations mandated by the Tax Codes. In the event a Taxpayer’s application for settlement is accepted, it will always be contingent upon timely filing of tax returns and payment of all taxes. Should the Taxpayer miss either a payment (1) under the installment plan or offer in compromise, or (2) owed for any other tax obligation, the Taxing Authority can (and will) terminate the previously reached settlement agreement. At that point, the Taxpayer becomes liable for every penny of tax (even if the Taxing Authority previously reduced it), plus all accrued penalties and interest.

Gaining Momentum

For that reason, one of the first things I tell Taxpayers who owe past-due tax is “draw a line in the sand.” That is, from that moment forward they must timely file all necessary tax returns and pay any resulting taxes. For any attempt to resolve past taxes with the Taxing Authorities to have a hope for success, the Taxpayer must commit to that practice and remain vigilant going forward. The proverbial “line in the sand” also helps Taxpayers differentiate between the past-due tax for which they are seeking a settlement and the future tax which they must timely report and pay.

When faced with outstanding taxes, there is nothing more frustrating and debilitating for a Taxpayer than to go through the time, effort, and expense of applying for an installment plan agreement or offer in compromise, receiving an acceptance, then having the acceptance revoked due to “noncompliance.” I have experienced that dreaded telephone call and/or letter from a Taxing Authority in which I am told the Taxpayer missed an installment payment or did not timely file a tax return and the settlement is no longer valid. At that point, the Taxpayer is worse off than before. Further, it makes it all the more difficult for the Taxpayer to try and work with the Taxing Authority in the future. The Taxpayer’s account is effectively “flagged” and overcoming that mark is a considerable, if not impossible, task.

Tax debt is a serious issue which must be addressed quickly, yet thoughtfully. It is not as simple as the late night television and radio advertisements and most internet search results would lead you to believe. More importantly, that research will likely not disclose the matter of compliance. Application for settlement of the tax debt takes time, care, and a complete commitment to make a personal and/or business financial change. Before you commence the process to resolve federal and/or state tax debt, understand that you must pledge compliance with the Tax Codes. The day that you submit your application for relief must be a turning point. Draw your line in the sand to address and satisfy past-due Tax Debt. Then, take that step forward.