Ways To Settle Your IRS Tax Debt
If The Tax Debt You Owe The IRS Is Keeping You Up At Night, You Might Not Realize There Are Solutions To Your Tax Problem
You might be feeling worried and frustrated, and you might have several audit letters from the IRS sitting in a drawer next to your bed.
You might be afraid to tell your spouse or anxious that you’ll get fired when your boss finds out you didn’t pay your federal taxes.
However, there is good news.
There are several ways you can arrange to settle your tax debt and stop worrying about it.
Plus, with some arrangements, you might even be able to pay back less than the amount you owe.
An experienced tax attorney can help you negotiate your tax debt settlement and support you in reaching the best solution for you.
What Are The Possible Ways To Settle Tax Debt With The IRS?
Here are some of the most common options for settling your federal tax debt.
Negotiate An Offer In Compromise
An Offer in Compromise (OIC) makes it possible to settle your tax debt for less than the amount you originally owed.
This option is available under the IRS Fresh Start Program.
If paying your full IRS tax debt amount is a financial hardship or you cannot afford to pay in full, an Offer in Compromise is a great option for you to explore.
In most cases, the IRS will approve an Offer in Compromise if the agency believes that the amount of your settlement offer is the most the IRS expects it can collect from you during the collection period.
Here is how it works:
- You make an offer of what you believe you can pay, based on your income, future income potential, your ability to pay, your expenses, and the equity in your existing assets, such as your home.
- The IRS will accept or reject your offer, typically within 6 months to a year but it can take longer.
- If the IRS doesn’t reject or return your offer within two years, and if you don’t withdraw it during that time, the offer is considered accepted.
- If your offer is accepted, you will be given options for paying the reduced amount in either a lump sum or on a monthly basis.
- If your offer is rejected, you can choose to appeal.
You are eligible to apply for an Offer in Compromise you have filed all required tax returns, made all required estimated payments and you are not involved in an open bankruptcy proceeding.
You must also have a valid extension for the last year’s tax return if you are applying for an Offer in Compromise after the current year’s April filing due date.
To apply for an Offer in Compromise, you must complete and submit a Form 656 booklet, including Form 656, Form 433-A (OIC), offer terms, and the application checklist.
Apply For A Partial Pay Installment Agreement
Another option for settling your tax debt for less than the amount you owe is a Partial Payment Installment Agreement (PPIA).
Under the IRS Partial Payment Installment Agreement (PPIA) program, the IRS agrees to accept smaller payments from you spread out over an extended period of time.
You must continue paying until your tax liability expires, which will be 10 years from the time your tax return was filed. Please be careful: depending on your previous activities, the 10-year statute may have been extended. It is always a good idea to have tax professionals check on the collection statute.
During your repayment term, the IRS may review your financial situation every two years.
If the IRS determines that you can afford to pay more because your finances have improved, it may ask you to provide your updated financial documents to determine whether to extend the same payment terms or increase your monthly payment. Or, it may otherwise attempt to collect your original tax debt amount.
In order to become eligible for a Partial Payment Installment Agreement (PPIA), you must first use all of your assets to try to pay your tax debt.
The IRS may also request that you use your equity in your home or other assets to pay off as much of your debt as you can.
To qualify, you will also have to be sure that all of your required tax returns have been filed and any estimated payments have been made.
If you are approved for this type of installment agreement, the IRS should suspend levies or wage garnishments placed against you, though a tax lien can still be filed against you or your property to protect the government’s interest.
Negotiate Another Type Of Installment Agreement
If you can’t pay your entire IRS tax debt amount in one lump sum, other installment agreements — or payment plans — allow you to pay the entire amount due in installments.
Attorney Sammy Kim can help you develop a reasonable installment plan and argued your case to the IRS to reach an agreement.
Under an extended installment agreement, you can pay back your tax debt over a period of up to six years (72 months). This period can sometimes be stretched a bit more depending on individual situations.
The amount you have to pay each month is decided by the IRS, depending on your assets, income, and expenses.
For certain taxpayers, you might qualify for a Streamlined Installment Agreement, which allows you to pay your tax debt with monthly direct debit payments for up to 72 months (6 years) without verifying your assets, income, expenses, or liabilities.
That could apply to you if you are an individual who owes $50,000 or less in IRS tax debt or for businesses that $25,000 or less.
As with other IRS debt relief options, your taxes have to be filed for you to qualify.
If your debt amount is less than $100,000, you may be able to apply online in certain situations at this link.
Otherwise, you will need to submit a Collection Information Statement, similar to a Partial Payment Installment Agreement. There are some line items within the required form where the IRS is particularly scrutinizing. So, be sure to talk to tax professionals who know what they are doing.
Seek Out Currently Not Collectible (CNC) Status
Another option is seeking to be labeled as Currently Not Collectible (CNC).
This classification of your IRS account means that the IRS will stop all collection actions against you.
You can breathe a sigh of relief, but it doesn’t mean that your tax debt is forgiven.
You might be able to be classified as Currently Not Collectible (CNC) status if the IRS finds that your gross monthly income is less than your allowable expenses, based on national standards.
That means that based on your financial details, you have proven that you cannot pay your tax debt without severe financial hardship. Collection action such as bank levy or wage garnishment will stop with CNC classification. Passport certification will be reversed as well. It is also a good thing that CNC won’t suspend or stop the collection statute from running.
However, Currently Not Collectible status does not mean that your tax debt is removed or abated. It will continue to accrue penalties and interest, and the IRS will apply your refund to the old tax debt. Current compliance is also very important.
This status might be appropriate if you are experiencing short-term financial hardship. It requires a phone call to the IRS and you would benefit from engaging a competent tax attorney to represent you in the process.
File For Bankruptcy
As a last resort, you could consider filing Chapter 7 bankruptcy.
Chapter 7 bankruptcy allows you to discharge any income tax debts that are at least three years old, as long as you are up to date on filing your tax returns.
A bankruptcy filing will also stop the IRS from issuing wage or bank levies against your personal accounts. An injunction, called the ‘Automatic Stay,’ is generally imposed against certain creditors from taking collection action.
However, bankruptcy isn’t a slam dunk solution and isn’t for everyone.
For one thing, if the IRS has filed a federal tax lien against your home or car, you must still pay it off before the lien can be removed, even if you file for bankruptcy.
You must also fall under the 240-day rule, which means that your income tax debt must have been assessed at least 240 days before you file for bankruptcy in order to be dischargeable.
There are other requirements as well, which vary by jurisdiction, in addition to the cost of filing.
Settling tax debt can be a stressful, complicated and time-consuming process, and it’s not necessarily easy to figure out which option is best for you.
Talk to a tax expert now to make it easier to settle your IRS tax debt and solve your tax problem.
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