Receiving a notice from the IRS that you owe back taxes can be an extremely stressful and worrying experience. Unresolved tax debts to the IRS can lead to serious consequences such as wage garnishments, bank account levies, and property liens if the debt remains unaddressed.
The good news is that there are various options and paths available to taxpayers who have accrued tax debts to reach resolutions with the IRS and negotiate reduced settlements. It is critical to address IRS tax debt issues promptly and intelligently. This article will delve into nine different ways that you may be able to negotiate and reduce the tax debts owed to the IRS.
1. Offer in Compromise
One of the best avenues for settling IRS tax debt for less than the total amount owed is through an offer in compromise (OIC) agreement. This allows taxpayers to pay a reduced amount that the IRS deems acceptable based on an evaluation of their financial circumstances. The IRS takes various factors into account, such as income, expenses, asset equity, and future earning potential, when assessing compromise offers.
Demonstrating an inability to fully pay the tax debt can help justify acceptance of a lowered settlement amount. However, the IRS rejects close to 50% of compromise offers received, so obtaining expert guidance is highly advisable to navigate the complexities of this process. For those unsure of where to begin or how to strategize, seeking a professional offer in compromise advice is recommended. It can be the difference between a rejected and accepted proposal. With such advice at your fingertips, taxpayers stand a better chance of successfully negotiating a reduction.
2. Installment Agreements: Paying in Manageable Chunks
If an offer in compromise is deemed unreasonable based on the ability to pay, the IRS may approve making monthly installment payments over an extended timeframe through an installment agreement. This can make paying off large tax debts much more manageable by spreading payments out over a time period of six years or more.
The IRS charges relatively low fees to establish installment payment plans. Taxpayers can opt for a standard monthly payment amount or request a partial payment installment agreement that bases payments on what they can afford.
3. Partial Payment Installment Agreement
A partial payment installment agreement allows taxpayers with limited disposable income to make reduced monthly payments of $25 or more based on their specific financial means. To qualify, the tax owed cannot exceed $10,000. This option provides a more affordable way for low-income taxpayers to pay a tax debt. However, penalties and interest continue accumulating on the unpaid portion under partial payment installment plans.
4. Checking for Errors: Request a Transcript
Before starting negotiations for tax debt relief, it is important to verify the accuracy of what the IRS claims you owe. Taxpayers can request a free transcript of their account activity and balances due for review.
Comparing the transcript against your tax records can uncover potential errors made by either the IRS or the taxpayer, such as duplicate assessments, unpaid credits, incorrect calculations, unprocessed amended returns, or failure to account for the statute of limitations. Identifying and correcting errors can lead to a lowering of the tax bill and a stronger negotiating position.
5. Apply for ‘Currently Not Collectible’ Status
The IRS may suspend enforced collection actions if forcing immediate payment would inflict significant financial hardship and an inability to pay necessary living expenses on the taxpayer. This “currently not collectible” status effectively pauses IRS collection efforts.
To qualify, taxpayers must substantiate that they cannot afford to pay both basic living expenses and the tax debt. This status shields taxpayers from aggressive collection methods like levies or seizures until their financial situation improves and allows for more breathing room. However, penalties and interest continue accumulating during this period of suspended collections.
6. Penalty Abatement: Waiving the Additional Fees
Taxpayers subjected to penalties for reasons such as filing or paying taxes late, underpayment, or other compliance issues can request an abatement or waiver if they have reasonable cause. The IRS may grant relief from penalties if factors like death, bankruptcy, disaster, or illness prevent meeting tax obligations. Penalty abatement can significantly reduce tax debts. Tax professionals can assist with navigating the process and criteria for qualifying for a waiver.
7. Declaring Bankruptcy: The Last Resort
Filing for bankruptcy is a last-ditch option for taxpayers who have exhausted all other means of paying their tax debts. Personal bankruptcy does not discharge or eliminate tax debts but can halt IRS collection efforts. Declaring bankruptcy carries risks and consequences, such as damaged credit. Most tax experts recommend fully exploring all other tax debt relief mechanisms before resorting to this method. The decision requires very careful consideration of an individual’s unique financial circumstances.
8. Statute of Limitations: When the IRS Can No Longer Collect
The IRS statute of limitations sets the period that the IRS can legally collect outstanding tax debts. This window is generally ten years from the date taxes were assessed. However, the statute of limitations varies based on specific circumstances. Understanding these rules can reveal tax debts that are no longer enforceable due to the statute of limitations expiring. However, taxpayers should consult professionals to use this to their advantage in negotiations.
9. Stay Compliant: The Importance of Filing Future Returns on Time
To boost their chances of successfully negotiating tax debt relief, taxpayers must continue fulfilling all filing and payment deadlines going forward. The IRS looks more favorably upon making deals with taxpayers who maintain compliance. Missing future tax deadlines can raise red flags and render taxpayers ineligible for settlement programs. Remaining compliant also avoids incurring additional interest and penalties.
Managing IRS tax debt may seem intimidating, but many options exist for negotiating settlements or alternate payment arrangements. The key is acting quickly and obtaining expert guidance to identify the optimal solution based on your unique financial situation. By taking the right approach, taxpayers can resolve IRS debts and regain peace of mind.