Compliance with tax laws is a requirement for people and businesses in the United States, but some taxpayers may struggle to pay the taxes they owe. A person who has unpaid taxes may worry that they will be subject to collection actions by the Internal Revenue Service (IRS) such as wage garnishment or tax liens. Currently, this is a major concern for those who have experienced financial difficulties due to the COVID-19 pandemic. As part of its ongoing efforts to address these issues, the IRS has given taxpayers more options for paying the taxes they owe through installment agreements.

Installment Agreements Under the Taxpayer Relief Initiative

Taxpayers with outstanding tax liabilities have the option to pay off the amount they owe over time by making regular payments to the IRS. To qualify for an installment agreement, a taxpayer will need to have filed all required tax returns and tax forms. To address the financial issues that many people have experienced due to the COVID-19 crisis, the IRS has created a Taxpayer Relief Initiative that has expanded people’s ability to use installment agreements. The changes made under this program include:

• While installment agreements had previously been available to individual taxpayers who owed up to $50,000 in taxes, penalties, and interest, this option is now available for certain individual taxpayers who owe up to $250,000. These taxpayers may be able to set up installment agreements without the requirement to provide financial statements verifying their monthly income and without the need for the IRS to file a federal tax lien.
• The time limit for paying off tax debts through short-term installment agreement plans has been increased from 120 days to 180 days.
• For taxpayers who have existing installment agreements, the IRS will automatically add certain types of taxes owed in subsequent tax years to their balance rather than causing them to default on their agreement.
• Taxpayers who use direct debit to make payments in an installment agreement can use the IRS’s Online Payment Agreement system to request changes to their agreement, such as lowering the amount of their payments or changing the payment due dates.

The Taxpayer Relief Initiative also provides several other options for those who owe taxes. In some cases, taxpayers may request that the IRS delay collection of taxes until their financial situation improves. Taxpayers may also be able to negotiate offers in compromise with the IRS to pay taxes owed, or they may qualify for penalty abatement relief if they can show reasonable cause for failure to file tax returns or failure to pay taxes.

Taxes are a reality that most U.S. citizens and residents need to deal with, and understanding the various tax laws that apply to a person or business can often be a complicated matter. If a taxpayer makes mistakes or oversights when filing tax returns or other tax documents, they could face penalties from the Internal Revenue Service (IRS). Being contacted by the IRS may cause taxpayers to worry that they will be subject to these types of penalties. However, not every piece of communication from the IRS will result in penalties, and taxpayers will want to understand the different types of notices that the IRS may send and their options for responding and addressing or correcting tax issues.

IRS Letters and Notices

Communications from the IRS can generally be grouped into one of the following categories:

• Soft letters - In some cases, the IRS may identify potential issues that may affect certain taxpayers and send notice reminding the taxpayer of the actions they can take to ensure that they are in compliance with tax laws and avoid potential penalties. In some cases, the IRS may request that a taxpayer provide certain types of information or file amended tax returns. In recent years, the IRS has sent soft letters related to issues such as reporting virtual currency transactions or filing the proper forms related to foreign accounts or investments.

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U.S. taxpayers are required to comply with a wide variety of tax laws, but understanding these complex requirements can sometimes be difficult, especially for those who own international assets or earn income from foreign sources. Taxpayers may be required to file multiple different types of forms related to foreign assets, accounts, and income, and those who have not met their foreign investment reporting requirements may be concerned about the possibility that they may face a tax audit and be subject to penalties. Fortunately, the IRS has provided procedures that taxpayers can follow to file delinquent international tax returns.

DIIRS Procedures

The IRS encourages taxpayers to voluntarily comply with its requirements for reporting foreign income and assets and paying any delinquent taxes that are owed. In some cases, taxpayers may be able to participate in the Streamlined Compliance program and use the Streamlined Domestic Offshore Procedures (SDOP) or Streamlined Foreign Offshore Procedures (SFOP) to disclose any unreported foreign assets or income and pay taxes that are owed. Depending on whether a person qualifies for the domestic or foreign procedures, they may also be assessed a penalty.

For those who do not need to use the streamlined compliance procedures to become compliant with their requirements, the IRS offers another program known as the Delinquent International Information Return Submission (DIIRS) Procedures. Taxpayers may qualify for this program if they have not filed one or more international information returns, they are not facing a civil examination or criminal investigation by the IRS, and they have not already been contacted by the IRS about the delinquent forms.

Those who live in the United States may choose to leave the country and live elsewhere, but if this will be a permanent change, they should be aware that they may face certain tax consequences. Expatriation occurs when a U.S. citizen chooses to relinquish their citizenship. Expatriation will also apply to a lawful permanent resident who holds a “Green Card” if their immigration status is revoked or abandoned or if they notify the IRS that they will be commencing residence in a country that has a tax treaty with the United States. Expatriates may be required to pay an exit tax, and they will want to understand how the tax laws will apply to their situation.

Who Is Subject to the Exit Tax?

The exit tax (also known as the expatriation tax) is a form of income tax that applies to the potential gains a person would earn by selling or disposing of the assets they own. While capital gains taxes typically apply to the profits a person earns when selling assets, a taxpayer may not actually realize these gains until years or decades after they leave the United States. Exit taxes ensure that the IRS can apply the proper taxes to the gains a person earned while they resided in the United States.

The exit tax will only apply if a taxpayer meets the qualifying criteria to be a “covered expatriate.” Three tests are used to determine whether a person is a covered expatriate:

Many taxpayers are understandably concerned when they receive a notification from the IRS stating that they owe taxes. If a taxpayer does not respond to a Statutory Notice of Deficiency, the IRS may perform a tax assessment and take action to collect the amount owed. A taxpayer may appeal the tax deficiency by filing a petition in Tax Court, but in some cases, a petition may not be received in time, resulting in a premature tax assessment.

Time Limits for Tax Assessments

After receiving a Notice of Deficiency, a taxpayer has 90 days to file a petition in Tax Court. After the end of this 90-day period, the IRS has 60 days to perform a tax assessment. The IRS may then take a number of different types of actions to collect the amount owed by the taxpayer, including issuing levies to seize a taxpayer’s assets or garnish his/her wages, placing tax liens on a taxpayer’s property, or offsetting a taxpayer’s tax refunds. 

While the IRS is not allowed to make an assessment during an open Tax Court case, it may begin to do so after the end of the 90-day period. In many cases, premature tax assessment occurs because the IRS has not received notification that a taxpayer has filed a petition in Tax Court. Since the 90-day deadline applies to the date that a petition is mailed, if a petition is sent close to the deadline, it may not be received until several days or even multiple weeks after the deadline. If a tax assessment is done even after a taxpayer has filed a petition before the deadline, the taxpayer may file a motion to prevent the assessment or stop IRS collection actions.