Tax Resolution

Offer in Compromise

An Offer in Compromise allows you to settle your tax debt with the IRS for less than the full amount owed. Under IRC Section 7122, the IRS will accept an offer when it represents the most the agency can reasonably expect to collect within the remaining time on the collection statute. The IRS isn't doing you a favor, they're making a calculated business decision that collecting something now is better than chasing the full balance and potentially recovering nothing.

The IRS evaluates every offer using a formula called the reasonable collection potential, or RCP. This formula has two parts. First, the IRS calculates the net equity in your assets, your home, vehicles, retirement accounts, bank balances, and other property, discounted to quick-sale value. Second, the IRS calculates your future disposable income by subtracting allowable monthly living expenses from your gross monthly income, then multiplying the result by 12 months for a lump-sum offer or 24 months for periodic payments. Your RCP is the total of your asset equity plus your projected future income. If your offer meets or exceeds the RCP, the IRS will generally accept it.

The reality is that fewer than half of all offers submitted to the IRS are accepted. The most common reason for rejection is that the taxpayer can pay more than they offered, either because they have more assets or income than they realized, or because the firm they hired didn't bother to run the formula before filing. This is where the late-night TV ads and aggressive online marketing cause real damage. Firms that promise to settle your debt for pennies on the dollar without first analyzing whether you qualify are wasting your money and your time.

At North Star Law, we run the IRS's own calculations before we recommend an offer. We use the same Collection Financial Standards the IRS uses, we analyze your assets the way the IRS will analyze them, and we project your future income using the same methodology. If the math supports an offer, we file it aggressively with confidence. If it doesn't, we tell you honestly and pursue a strategy that actually fits your situation.

Important requirements: you must be current on all tax filings before the IRS will consider your offer. All outstanding returns must be filed. You must also remain in full compliance, filing all returns and making all required estimated tax payments, during the entire review period, which typically takes 12 months or longer. The application requires a $205 filing fee and an initial payment that is non-refundable if the offer is rejected. The 10-year collection statute is also suspended while your offer is pending, which is an important strategic consideration.

Currently Not Collectible Status

If you owe the IRS but genuinely cannot afford to make any payment without creating a financial hardship for yourself or your family, you may qualify for Currently Not Collectible status. CNC status is exactly what it sounds like, the IRS temporarily shelves your account and suspends all active collection. No bank levies. No wage garnishments. No asset seizures. The IRS essentially agrees that collecting from you right now would cause undue hardship, and they stop trying.

The IRS determines eligibility by comparing your gross monthly income against your allowable living expenses using the IRS's national and local Collection Financial Standards. If your allowable expenses meet or exceed your income, meaning you have zero or negative disposable income, the IRS will generally place your account in CNC status. You'll need to provide financial documentation, typically on Form 433-F or Form 433-A, to support your claim.

There is a critical strategic element to CNC status that many practitioners overlook: the collection statute. Under IRC Section 6502, the IRS has 10 years from the date of assessment to collect a tax debt. That clock continues to run while you are in CNC status. If your financial situation does not improve before the statute expires, the debt is effectively gone, the IRS can no longer collect it. For a taxpayer who is five or six years into a 10-year collection statute with limited income and few assets, CNC status combined with the running statute can be the single best outcome available.

Penalties and interest do continue to accrue while you are in CNC status. Your balance will grow. But if the IRS cannot collect it before the statute runs out, the growth is irrelevant. We help clients evaluate whether CNC status combined with the collection statute timeline produces a better long-term result than an offer in compromise or installment agreement.

The IRS will periodically review your financial situation while you are in CNC status, typically every one to two years. If your income increases significantly, the IRS may remove CNC status and resume collection activity. This means it's important to understand CNC status as a potentially temporary solution, although for many taxpayers it becomes a permanent one.

Installment Agreements & Payment Plans

If you owe the IRS more than you can pay in full but have the income to make monthly payments, an installment agreement under IRC Section 6159 allows you to pay your tax debt over time. While the agreement is in effect, the IRS will not levy your bank accounts, garnish your wages, or take other enforced collection action, as long as you stay current on your payments and remain in compliance with all filing requirements.

The simplest option is a streamlined installment agreement, available to individual taxpayers who owe $50,000 or less in combined tax, penalties, and interest. Streamlined agreements require no financial documentation, no bank statements, no pay stubs, no asset verification. You simply agree to pay the full balance within 72 months or before the 10-year collection statute expires, whichever is shorter. You can apply online through the IRS's website, and approval is essentially automatic if you meet the threshold.

For balances between $50,000 and $100,000, expanded options are available that still don't require full financial disclosure, though the payment terms may be tighter. The IRS typically wants larger balances resolved within the remaining statutory period, which means higher monthly payments.

When the balance exceeds $100,000, or when you cannot afford the streamlined payment amount, the IRS requires a full financial disclosure on Form 433-A for individuals or Form 433-B for businesses. The IRS will analyze your income, expenses, assets, and liabilities using their Collection Financial Standards to determine what you can afford to pay each month. If the IRS calculates a higher disposable income than what you've proposed, they will counter with a higher required payment.

One option that many taxpayers, and even some tax professionals, don't know about is the partial payment installment agreement, or PPIA. If your monthly disposable income is positive but not large enough to fully satisfy the debt before the collection statute expires, the IRS may accept lower monthly payments with the understanding that a balance will remain when the statute runs out. The uncollected balance effectively disappears. A PPIA achieves a similar economic result to an offer in compromise, you pay less than you owe, without the formal application process, the $205 filing fee, or the lump-sum initial payment.

It is important to understand that penalties and interest continue to accrue during any installment agreement. The failure-to-pay penalty is reduced from 0.5 percent to 0.25 percent per month while an agreement is in effect, but interest continues at the federal short-term rate plus three percent, compounded daily. On a $100,000 balance, the interest alone can exceed $500 per month at current rates. This means that a significant portion of each monthly payment may go toward penalties and interest rather than reducing the principal balance. We help clients understand the true cost of an installment agreement over its full term and compare it against other resolution strategies to determine the most cost-effective path.

Compliance is non-negotiable. If you miss a payment, fail to file a future return, or incur a new tax liability that you don't pay, the IRS can default the agreement and immediately resume full collection activity. We advise every client to set up automatic monthly payments and to contact the IRS proactively if their financial situation changes rather than simply missing a payment and triggering a default.

Which Option Is Right for You?

The right tax resolution strategy depends entirely on your specific financial situation, your income, your assets, your expenses, the amount you owe, and how much time remains on the IRS's 10-year collection statute. An offer in compromise is powerful but only works when the math supports it. Currently not collectible status provides immediate relief from collection but doesn't reduce your balance. An installment agreement keeps you in compliance but can be expensive over time when penalties and interest are factored in.

Many taxpayers make the mistake of pursuing a strategy because they heard about it on television or because a friend recommended it, without understanding whether it's the right fit for their situation. An offer in compromise filed by a taxpayer who doesn't qualify wastes months of time, a non-refundable application fee, and suspends the collection statute, actually making the situation worse. An installment agreement entered into without understanding the true cost of accruing interest can result in years of payments with little progress on the balance.

At North Star Law, we don't push every client toward the same solution. As both a licensed attorney and a CPA, Phillip Zagotti brings a dual perspective to tax resolution that most practitioners simply cannot offer. We analyze your complete financial picture using the same formulas and standards the IRS uses, compare the projected outcomes of each available option, and recommend the strategy that produces the best result for your specific circumstances.

If you owe back taxes and the IRS is threatening collection action, or if you've been ignoring the problem and know it's getting worse, schedule a consultation. The sooner you act, the more options you have.