In order to receive any kind of “collection alternative”, a taxpayer must be, and remain, tax compliant. What is “tax compliance”?
Before we define tax compliance, let’s take a moment to discuss the term “collection alternative”. A collection alternative is, as the name suggests, an alternative to collections such as wage garnishment, levies, liens and other, harsher, collection activities such as asset seizure. The IRS does not prefer to engage in these collection actions but they will resort to these activities if there are taxes that have been assessed (i.e., a return has been filed and the amount is due) and has not been paid.
So, the IRS offers alternatives to collections. The most common collection alternatives are installment agreements (payment plans) and offers in compromise (settlements for less than the tax due). However, the IRS will not offer a collection alternative for back taxes if the taxpayer continues to accrue new liabilities and the IRS requires taxpayers seeking collection alternatives to first prove that they are remaining current which is what it means to be “tax compliant”.
In order to be considered “tax compliant”, a taxpayer must be current with all filings and must be current with all payments. For the filing element, a taxpayer must file tax forms when due (i.e., file their 1040 by April 15th and, for businesses, filing Forms 941 every quarter and Form 940 every year in addition to whatever income tax return is due). For the payment element, a taxpayer that earns all income as an employee (reported on Form W-2) generally is compliant already because federal income tax is withheld from each paycheck. If a taxpayer earns non W-2 income (i.e., income that is generally reported on Form 1099), then the taxpayer must make estimated tax payments that are sufficient to cover the expected current year tax liability as it is accrued and not waiting until April 15th to pay.
Tax compliance can be tricky for non W-2 income, especially for taxpayers with uneven, cyclical or season income. We work closely with our clients to understand their income situation and then communicate with the IRS to achieve tax compliance before, or as part of, a collection alternative strategy.