Many taxpayers are unaware of the numerous options they have for paying IRS back taxes and tax debt and allow the issues to worsen. You can negotiate back taxes and tax debt with the IRS (Internal Revenue Service) if you can only pay a portion of the taxes or none at all. However, you must take swift action to take full advantage of these options.
The most effective way to settle your tax debt is to pay what you owe in full. However, this isn’t an option for everyone, especially when interest and penalties make the debt significantly higher. Fortunately, there are more options available to you when you cannot pay your tax debt in full. If you call the IRS, they will pressure you and will highly recommend that taxpayers pay what they are able to immediately to limit the impact of IRS collections, which includes all the interest and other penalties. Once you pay what you can, next look into other options for settling your debt.
There are options that allow taxpayers to (1) pause collection on tax debt, (2) enable taxpayers to get into a payment plan, or (3) settle their debt for a lower amount. Depending on your unique circumstances, you may qualify for one or several of these options:
An Offer in Compromise
An Offer in Compromise enables you to settle a larger tax debt for a smaller amount. The IRS used to call this the Fresh Start program. Not everyone qualifies for an Offer in Compromise, but it can be an incredibly effective way to remove your back tax debt for less than you owe. It can also help you meet your individual needs and pay your taxes in the future.
An Offer in Compromise is more likely to be approved if you are unable to pay the full back taxes you owe or if paying them would put you in significant financial hardship.
Qualifying for an Offer in Compromise
In order to submit an application for an Offer in Compromise, the following must be true:
- You filed all your required tax returns and made the necessary estimated payments.
- You are not currently in a bankruptcy proceeding.
- If you are applying for an Offer in Compromise for this year’s return, you must have a valid extension.
- If you are an employer, you must have deposited tax payments for the current return and the past two returns prior to applying.
The IRS will consider the following factors in determining if you qualify:
- Your ability to pay your taxes
- Your monthly income and expenses
- Your other financial resources and assets
Based on these factors, the IRS must determine if a qualifying situation exists. In order to be approved for an Offer in Compromise, the IRS must determine one of the following to be true:
- You are unable to pay the full tax liability. The IRS will also consider whether you will be able to pay the full liability at any point before the statute of limitations ends.
- Paying the full debt would place you in financial hardship. This is true if you are working full time and would be unable to meet your basic needs after paying your full liability.
- There are legitimate doubts about whether you owe the requested tax. If there is uncertainty about whether the information is accurate, the IRS may settle through an Offer in Compromise.
The IRS prefers that taxpayers attempt or review other payment methods before an Offer in Compromise. If the IRS does not approve your application, you may be able to appeal the decision.
Types of Offers in Compromise
You can either obtain an Offer in Compromise in a lump sum payment or a periodic payment. When you send in your application, you must send in an initial payment. If you qualify under the IRS’s low-income guidelines, this payment is not required.
If you request a lump sum payment, you must include 20% of the offer. If the lump sum is approved, you must send the rest of the lump sum in five or fewer payments. If you request a periodic payment, this must be the first monthly installation as outlined by the agreement. You should continue the monthly payments while the IRS determines if it will accept the Offer in Compromise. If approved, you typically have between six months and two years or until an accepted offer is paid fully.
An Installment Agreement
An installment agreement is a payment plan that does not lower the amount of taxes you owe. Instead, it enables you to pay them back over a period of time in monthly installments. This option is beneficial for taxpayers who believe they can pay their full debt if provided some additional time.
Your monthly payment amounts will rely on the following factors:
- The amount of your tax liability
- How long the IRS is willing to wait to receive full payment
- Your ability to pay
- The IRS financial standards
IRS Payment Plan Options
There are different ways you can pay the IRS through an installment agreement. Each has unique fees depending on the type of plan and whether you apply online, through mail, or over the phone. If you qualify for low-income guidelines, these fees can be lowered. The options for individual IRS payment plans include:
- Short-Term Payment Plan: You qualify to apply online for a short-term plan if you owe $100,000 or less in back taxes, including interest and penalties. This is paid within 180 days or less.
- Long-Term Payment Plan: You qualify to apply online for a long-term plan if you owe $50,000 or less in back taxes, which includes penalties and interest. This is paid monthly, and you must have filed all your required tax returns.
Payment plans do not stop penalties and interest from accruing. These continue until the balance has been paid in full. The IRS also has options for payment plans for businesses.
Determining the right amount when requesting an installment agreement can be difficult. A skilled tax attorney can help you review your case and negotiate an amount that will benefit both you and the IRS. If you are approved for a payment plan, it is essential that you make those payments. Otherwise, the IRS can take collection action against you. Additionally, a payment plan can be modified, or you can discuss other options with the IRS if your circumstances change.
Currently Not Collectible
When you are unable to make any payments on your tax debt, you may be able to temporarily pause the collection of your tax debt until you have more financial ability. This option does not eliminate your tax debt but prevents the IRS from taking actions such as wage garnishments and bank levies. If the IRS agrees that you have no ability to pay, the IRS codes it in their system that the tax debt is in a currently not collectible status.
The IRS typically requires income information and proof of your economic situation, including your expenses and resources. While marked currently not collectible, your tax debt still incurs interest and penalties. Once you are determined to have the financial ability to pay taxes, the status will be removed, and a full payment or installment agreement will be required.
Other Options for Tax Debt Relief
There may be other options that can help you limit the tax debt you face. These include:
- Penalty and Interest Abatement: Penalty abatement applies to multiple types of penalties and interest, such as a late payment, failure to file, or other issue. If it is a taxpayer’s first penalty or if they have a reasonable cause for the issue, including circumstances beyond their control, they may qualify for this option. Abating the interest and penalties you owe on a back tax can be the first step prior to settling the back taxes through an Offer in Compromise or payment plan.
- Innocent Spouse Relief: In unique cases, a taxpayer can file for tax relief through innocent spouse relief. This is possible if:
- Their spouse made errors on a joint income tax return, resulting in penalties or excess taxes,
- The taxpayer was unaware of this and had no reason to know of it, and
- It would be unfair to hold the taxpayer responsible for their spouse’s error.
- Incorrect Information: If you believe there is indirect information on your bill for back taxes, you should contact the IRS and present relevant documentation to show why it is incorrect.
- Bankruptcy: If you have filed for bankruptcy, inform the IRS, and they will temporarily stop collections.
A tax law attorney is incredibly useful when determining what options you qualify for and how to effectively apply for relief.
Delia Law Can Help
It’s essential that you work with a tax lawyer who has experience negotiating with the IRS and navigating its bureaucracy. At Delia Law, we have worked for years in IRS tax debt and debt relief. We can outline the options available for your unique situation and help you make informed choices about your financial future. Contact our firm today.
