When the IRS conducts an audit or a taxpayer otherwise ends up in the collection process, there are a few ways the matter can be resolved. On appeal, the taxpayer can argue against the tax in the first place, provide evidence that the IRS has assessed tax incorrectly. An appeal can also focus on trying to eliminate penalties. By statute, unpaid tax balances accrue interest and penalties until they are paid in full. It is very rare for that interest to be waived, usually only in situations in which error by the IRS causes the interest to accrue in the first place. Penalties can be waived or reduced depending on circumstances, with greater flexibility than is applied to interest.
Barring a complete elimination of the taxes owed, however, the process is going to end with some sort of payment arrangement. Paying the balance in full is preferable, since it prevents the accrual of additional interest and penalties, but oftentimes that is not an option. In those situations, the most common recourse for taxpayers is to enter into an installment agreement. For small balances owed, the IRS will typically agree to an installment agreement as a matter of course. For larger balances, the IRS will require financial disclosures about the taxpayer’s assets, income and expenses. The aim of an installment agreement is to pay the full balance over time, with maximum duration usually limited to 72 months. Interest and penalties continue to accrue during this period.
While an installment agreement is in effect, taxpayers need to be especially careful of deadlines for new returns. This is because the agreement will be terminated if the taxpayer fails to file a return or pay the tax due. Terminated agreements can be reinstated, but this can be a time consuming process, often requiring a fresh round of financial statements to be completed. There’s also of course no guarantee the IRS will agree to reinstatement in lieu of pursuing more aggressive collection action, which could include levies or liens.
Horowitz Law Offices regularly represents taxpayers before the IRS, the Illinois Department of Revenue and the Chicago Department of Finance to resolve their tax disputes. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org