Internal Revenue Service (IRS) collateral agreements are agreements between a taxpayer and the IRS whereby the taxpayer makes a promise to the IRS to perform in some way. It may be a promise to pay a delinquency or file a return, but it is not to be confused with an offer in compromise. Unlike a collateral agreement, an offer in compromise is not a collateralized agreement – the taxpayer does not need to provide collateral – and it is not an agreement to satisfy an outstanding tax obligation.
There are a number of reasons that a taxpayer may wish to consider a collateralized agreement with the IRS. One reason this may be beneficial is that it can serve as an alternative to the IRS’ filing of a Notice of Federal Tax Lien (NFTL) on the assets of the tax debtor. The filing of an NFTL has negative financial implications, and to the extent a collateralized agreement can avoid the risks associated with an NFTL filing, it should be considered.
That said, taxpayer’s should be mindful that failure to adhere to the terms of the collateralized agreement may result in the liquidation of the collateral provided to the IRS. Furthermore, an IRS collateral agreement is not subject to the ten-year statute of limitation on federal tax debt collection, given that entering into an agreement forms an independent legal obligation. Also to be kept in mind is that the collateral may have to be substantial depending upon the nature of the pledge in the agreement. This is because the value of the collateral provided by the taxpayer to the IRS must be “sufficient to protect the interests of the Government throughout the life of the agreement.” Internal Revenue Service, Internal Revenue Manual, 18.104.22.168 (10-25-2011), available at https://www.irs.gov/irm/part5/irm_05-006-001.html.
To file a collateral agreement request, a taxpayer must prepare in triplicate a request containing the following information:
- Identification of the parties (taxpayer, IRS, and/or third party)
- Total tax liability
- Method of proposed payment of the tax liability
- Specified dates as part of a plan of required actions
To find out more about your options with respect to collateral agreements with the IRS, you should speak with an experienced tax attorney that understands the options available to you. While a collateralized agreement could be a good solution for you, it is just one of a number of remedies available to the taxpayer with outstanding tax obligations, and a tax professional is likely to have an understanding as to which of these remedies is best for you.