Are You Eligible to Settle Tax Debt with the IRS?
The United States tax system operates on voluntary compliance, meaning that the Internal Revenue Service assumes taxpayers will honor their commitment to pay the taxes that are due each year. In a typical year, the vast majority of the 150 million individual tax returns processed by the IRS will be handled without any problems.
Unfortunately, some taxpayers get into a tax problem by purposely not meeting their income tax debt. In other instances, due to unfortunate personal circumstances, they cannot meet their tax debt obligation in an allotted time frame. Not meeting this responsibility triggers a series of collection activities that could lead to serious repercussions.
What are your Tax Debt Rights and Responsibilities?
It’s important for every taxpayer to know their rights and responsibilities when it comes to meeting their tax debt obligation. A taxpayer’s responsibilities include:
Check Your Eligibility
- Accuracy – A taxpayer or their designated tax professional must submit accurate information that is used as the basis to calculate an appropriate income tax debt. Keeping good records is an important part of this responsibility.
- Honesty – Lying to the IRS can create problems far beyond any IRS tax debt problem.
- Cooperation – Taxes are inevitable, and the higher the degree of cooperation between a taxpayer and the IRS, the more smoothly the process will go.
- Timeliness – A taxpayer or their tax professional must know what deadlines and tax laws are in place, whether it’s making quarterly estimated payments, how long of an extension they may be granted, or any other number of dates that may apply to a particular situation.
On the flip side, taxpayers do have several rights as well. In fact, the Internal Revenue Service has adopted a formal Taxpayer Bill of Rights. It summarizes dozens of existing codes and laws into 10 fundamental rights to make this information more clear and understandable for taxpayers. Those fundamental rights include:
- The right to be informed
- The right to quality service
- The right to pay no more than the correct amount of tax
- The right to challenge the IRS’s position and be heard
- The right to appeal an IRS decision in an independent forum
- The right to finality
- The right to privacy
- The right to confidentiality
- The right to retain representation
- The right to a fair and just tax system
The IRS maintains a taxpayer advocate service that further details the Taxpayer Bill of Rights. It can be accessed at IRS Taxpayer Rights website.
What is Tax Liability?
Although most people think of tax liability as strictly the amount of taxes owed from earnings and wages only, the fact of the matter is, income tax liability is only one part of a person’s overall tax liability.
Tax liability definition: To truly define tax liability for a person or a business, a broader approach is required and will need to include self-employment taxes, tax penalties and interest, penalties for the early distribution of IRAs, and even tax penalties due for lack of Affordable Care Act coverage.
The easiest way to understand the answer to “what is a tax liability?” is to understand that certain events will trigger a tax liability calculation. These events are normally the generation of income, gains made from the sale of an asset such as a house, and other events that may result in the need to collect taxes.
Check Your Eligibility
Knowing how to calculate a tax liability is important so that planning and allowances can be made to satisfy a tax debt when it is incurred. Taxpayers or their designated tax professionals must be able to determine what the tax base of an event is and then multiply it by a tax rate. Taxpayers may be able to adjust their tax liabilities by optimizing deductions or employing other strategies to minimize what they will ultimately owe. In some cases, this may actually result in no tax liability.
Frequently Asked Questions about Tax Liability
How do you calculate a tax liability?
Certain events will trigger different types and amounts of taxes that are due to the federal, state and local government. For income taxes, you must determine your gross income for the year, which is defined as income from all sources. Then you will reduce your gross income based on the types of deductions that can be applied to your particular situation. The result is your net or taxable income, and this is the figure that you will use to calculate how much income tax you will have to pay.
The Internal Revenue Service has designed a tax liability calculator for 2017 returns. It will help taxpayers estimate what they will owe or if they are due a refund for the current tax year. To access the calculator, go to https://apps.irs.gov/app/withholdingcalculator/
What are my tax liabilities if I am in the process of getting a divorce or recently completed a divorce process?
In situations where married couples file a joint tax return and later end up getting a divorce, both taxpayers are liable for paying a tax, plus any penalties or interest that is added at a later date. The IRS considers both parties to be liable for the full amount due. A divorce decree does not negate this liability, even if one party agreeing to take on the tax debt as part of the divorce settlement.
There are exceptions in some cases. Innocent Spouse Relief may be claimed if it can be proved that one spouse was solely responsible for understated taxes because of underreported income, erroneous deductions, or credits that have been improperly reported. A spouse must verify that they had no knowledge or way of knowing that there was an understatement of the amount of taxes due at the time they signed their joint return. Other possible forms of relief can include Separation of Liability Relief and Equitable Relief.
What options do I have if I cannot pay my tax debt by the time it is due?
The Internal Revenue Service offers many ways to defer your tax liability, although in most cases, you’ll still need to make a full payment to them at some point. For individuals, April 15 has always been the due date best known for paying taxes. But sometimes, people come up short. For smaller amounts due, one course of action is to pay as much of your tax that is due by April 15. The IRS will process your return and send you a bill for the amount still owed, plus a small penalty and interest. Do your best to pay that sum off, but if you cannot, the IRS will allow you to set up a repayment program. Terms will vary depending on how much you owe.
Currently, repayment plans are generally accepted up to $50,000 in debt, and you will have up to 72 months to pay off your obligation. If you are seeking deferred tax liability assistance, you must meet certain requirements or you could be found in default.
Another course of action if you are struggling and can’t make a full repayment to the IRS is to seek an Offer in Compromise. The OIC Program allows you to settle with the IRS for a percentage of what is owed. Once this amount is paid, you are free and clear of any additional encumbrances on your assets or bank accounts.
What if I intend to pay the full amount of taxes due, but need more time to complete my return past the April 15 deadline?
The IRS says not to panic. The agency automatically grants six month extensions to taxpayers when they file Form 4868 which can be done online by clicking on the Free File link at www.IRS.gov. This gives taxpayers until October 15 to file a return. Be aware that to get the extension, taxpayers will need to estimate their tax liability and pay any amount due. Going this route means a taxpayer can avoid a late filing penalty which is five percent per month on any unpaid balance.
If I declare bankruptcy, will I still need to pay my tax debts?
The Bankruptcy Code regarding tax debts and its relationship to bankruptcy proceedings is somewhat complicated, but in general, a person or a business must continue to file tax returns. There are different rules depending on which chapter bankruptcy you file. Failure to file timely tax returns could cause a bankruptcy case to be dismissed or to be converted. It is best to check with a tax lawyer or tax accounting professional for your individual circumstances on how the bankruptcy codes will affect you.
Tax Problems: What Will Happen If I Don't Pay My Taxes?
If you don’t pay your taxes by the time they are due, the IRS will begin a collection process to secure the full amount. Interest and penalties will start to accrue on unpaid taxes until your debt is settled, meaning you could be on the hook for a much larger amount than you originally owed.
The first step in the collection process is that the IRS will send you a bill for the amount you still owe, including a line-item notice detailing interest and penalties. This notice will also demand payment in full. Interest compounds daily on unpaid taxes that you owe and the rate is equal to the Federal short-term rate plus three percent. A late payment penalty is also added which starts at .05 percent of the amount you owe, but it can increase monthly until it reaches a rate of 25 percent.
If you file late and you pay late, then you can be hit with a penalty of 5 percent. However, if you are more than 60 days late, you could be looking at a penalty of up to 100 percent of the amount of the tax you still owe. In some cases, these fees and penalties may be waived if you can give the IRS a good reason for not filing or paying your taxes on time.
If you are having difficulty paying your taxes, do not ignore notices and warnings from the IRS. If you do not open up a dialog with the IRS, the next steps the agency will take are much more serious and formal.
How Does Tax Relief Work?
Tax Problems Defined, and How to Find Tax Problem Help
Many times, through no fault of our own, we hit a bad streak. This might include the loss of a job, medical issues, the death of a loved one, or any other number of situations that could arise without warning.
When these events take place, your personal life can be thrown into turmoil, including your finances. Meeting monthly obligations can be a challenge, and if your situation lingers, you could also face longer term issues such as trying to pay your mortgage, or other financial issues.
Many Americans are confronted with IRS tax problems, and while they can be intimidating, it’s important to note that there are several ways individuals and businesses can work with others on how to get tax relief help.
There are a number of mechanisms built into the IRS that can lead to a tax problem resolution, helping you to get back on your feet and enjoy a fresh start.
Tax problems can be handled through a variety of repayment plans, the OIC Program or even with the help of the IRS’s own Taxpayer Advocate Service.
It’s important to do your due diligence when looking at each of these options. Making the right and informed choice can help resolve tax problems with the IRS with the least amount of financial pain possible, but the key is to explore options thoroughly before entering into any kind of agreement.
Frequently Asked Questions about Tax Problems
What are the pros and cons of using tax software such as Turbo Tax to complete my taxes?
Turbo Tax is one of many “out of the box” tax software solutions for people who want to take on the task of doing taxes on their own. While many people swear by the good results, others have encountered Turbo Tax problems.
If you’re considering using Turbo Tax, you might want to first check out consumer affairs websites to see what kind of shortcomings the software may have. In years past, users have reported incorrect software updates, nonresponsive customer service, additional charges for consultations and other issues, leaving many users dissatisfied with Turbo Tax as an option for filing taxes.
The Internal Revenue Service will still hold you accountable even if the software you use incorrectly calculates your taxes. You need to weigh that as one of the concerns if you decide to use a program such as Turbo Tax to assist you with completing a return.
I am a small business person and have struggled with trying to stay in business. This has created some cash flow issues resulting in not being able to pay my sales tax to the state. What options do I have to resolve my sales tax problems?
Sales taxes are imposed by the state on retailers who must pay a certain percentage of their sales for the privilege of selling tangible goods. The sales tax rate will vary by state depending on tax laws currently on the books.
To ensure that businesses are paying an appropriate amount of sales tax, state revenue agents may conduct audits of a business and ask for verification of sales and tax payments. If an audit uncovers that gross receipts were understated to avoid paying sales taxes, this could trigger an additional investigation at both the state and federal levels and a tax problem could grow even larger.
If you find yourself struggling to meet sales tax obligations, it is best to contact your state officials to see if you can work out an installment plan. While this may be difficult for you, transparency is your best option for achieving a tax resolution.
What should I do if I have attempted to work with the IRS on a tax problem solution, but have not been able to get my situation resolved.
You have a couple of options that you can explore. If you have the means, you might consider hiring a tax attorney or an accountant who specializes in tax law to represent you. There are also other tax relief companies who can review your situation and work with the IRS on your behalf to craft a customized tax relief program to fit your particular situation. All of them should offer you an initial free consultation to review your documents and see if they will be able to assist you.
If I’m having problems getting my IRS tax problems resolved, are there any internal resources at the IRS that I can reach out to assist me?
There is an independent organization working inside the IRS called the Taxpayer Advocate Service (TAS). TAS offers free consultations and works with taxpayers who are experiencing economic impacts and have not been able to resolve tax problems with the IRS through normal channels. There are several ways to contact a TAS representative:
- By phone at 1-877-777-4778 or TTY/TDD at 1-800-829-4059.
- By filing Form 911, Request for Taxpayer Advocate Service Assistance
- In writing by contact your local taxpayer advocate as listed in IRS Publication 1546, Taxpayer Advocate Service – Your Voice at the IRS.
- On the web at http://www.irs.gov/advocate.
I have a large amount of credit card debt. Does this have any impact on working with the IRS to come up with a tax resolution plan for me?
Generally, the IRS does not take into account your credit card use or your credit card debt, unless you are attempting to put together a repayment plan and list monthly credit card payments as one of the expenses you need to pay. The amount being channeled to pay your credit card debt means you have less net income to pay your IRS obligation.
How Does Tax Debt Relief Work?
Like it or not, tax debt is unpleasant burden that must be dealt sooner rather than later. In a society where every dollar counts for most people, the specter of having to pay the IRS and state tax collection agencies a larger chunk of your hard earned dollars than you anticipated can leave you scrambling for tax solutions on how to minimize that debt.
Fortunately, there are many options for people seeking tax debt relief. This doesn’t always mean that a person or a business’s tax burden will be reduced, but in a vast majority of cases, it means some form of payment can be set up that works better within an individual’s framework of circumstances.
You can attempt to work with the IRS on your own, or you can seek out the assistance of a tax or legal professional to represent you to the IRS. There are also several private tax settlement companies that can provide a variety of services as well. Many times, tax relief companies employ former IRS employees who know the system through and through, ensuring that you are getting the best possible representation for your tax debt issues. However, a small fraction of firms can be less than reputable, and you need to proceed with caution before you enter into an agreement.
Frequently Asked Questions on Tax Debt Relief
What is the Mortgage Forgiveness Debt Relief Act and how can it help me?
In 2007, the federal government enacted legislation that offered an IRS tax debt relief program for homeowners who had mortgage debt forgiven or canceled or who had gone through a foreclosure. Under normal circumstances, debt that is forgiven is considered income for tax purposes and must be reported as such on a tax return. This tax debt relief act helped financially burdened homeowners from taking another hit if any part of their mortgage debt on a principal residence was forgiven in any tax year between 2007 and 2013. It allowed for up to $2 million to be excluded as income and was extended through passage of the Tax Increase Prevention Act to include debt forgiven through 2014. There are several rules and stipulations to qualify for assistance under this act, and it is best to consult with a tax professional to see if you qualify.
I own a business and wanted to know if payroll tax debt relief and income tax debt relief treated the same way by the IRS?
On behalf of their employees, business owners have a responsibility of withholding and paying payroll taxes to the IRS. Under normal circumstances, employees trust a business owner to withhold those taxes and send the amount due to the IRS. Because half of the FICA tax withheld is actually the employee’s money, the IRS becomes exceptionally aggressive with collecting back employment tax. There is virtually no payroll tax debt relief available to business owners. However, the IRS is much more agreeable when it comes to assisting businesses and individuals with income tax debt relief. Several repayment plan options are available as well as an OIC Program for taxpayers having trouble meeting their obligations.
I currently have tax debt problems and I have been thinking about retaining a private tax debt relief company to assist me. What should I look for to make sure I don’t fall victim to a tax debt relief scam?
There are numerous private companies who can help taxpayers struggling to meet their tax debt obligations. Every one of them has the same goal but each may approach matters with slightly different strategies. Stopping wage garnishments, assisting with audits, working on OIC offers or helping to set up repayment plans can be achieved on a fee based arrangement. The vast majority are reputable and their work can be verified by checking tax debt relief companies reviews online through Yelp, Angie’s List, the BBB or various consumer watchdog groups.
Another way to ensure you’re working with a reputable entity is through a word-of-mouth referral, or by contacting your local Chamber of Commerce. To avoid being ripped off, be wary if a service asks for a large retainer up front, is vague with the services they provide, is difficult to reach, or only has an online presence. Also make sure the company has been in business for several years and has a verifiable track record.
What if I can’t afford to pay a private tax debt relief service. What other options are available to me?
In many communities, tax professionals may offer free tax debt relief, tax preparation, and information to low income or senior populations. Some non-profits may also offer the same types of services, setting up tax debt relief centers or designating special days to people to get the help they need. You can start by searching online for free tax debt relief information or by calling your city government offices to see what resources are available for your particular community. The IRS also has an internal Taxpayer Advocate Service that may be able to assist you if you have been struggling to find the right agreement or compromise with the IRS. This service is free and can be accessed by contacting the TAS through the IRS.
I owe taxes at the state level and at the federal level. What kinds of state tax debt relief options are available to me and how are they different from federal tax debt relief options?
The good news is that most state tax regulatory authorities follow similar guidelines and programs to the IRS for resolving tax debt issues. Most states have repayment plan options in place as well as their own version of an Offer in Compromise Program. The amounts, timeframes and procedures will vary by state. For more information that is relevant to your particular state, contact your state’s tax regulatory authority.
What is a Federal Tax Lien on Property?
A Federal tax lien can be filed against your property as a way for the government to protect its interest in your tax debt. When the Internal Revenue Service files a Notice of Federal Tax Lien, public records will indicate that the IRS has a claim against your property. This means the property cannot be sold until the lien is satisfied.
At other times, the IRS could proceed with a Federal tax levy. Much more serious than a lien, a levy is an actual seizure of your property or certain assets you own. A levy can extend to bank accounts, work income, retirement income, cars, boats and your home. These assets can be sold to satisfy your tax debt.
For the most egregious tax cases, the IRS could decide to launch a criminal investigation for tax fraud, tax evasion or related crimes, which could have serious and far reaching impacts not only on your bank accounts and other financial assets, but on your personal freedom as well.
Key Questions: What do I need to know about about wage garnishments? How much does tax relief cost?
What is a wage garnishment and how is it put into place?
A wage garnishment is also known as a wage levy and is a legal way the Internal Revenue Service can collect a tax debt without having you pay them directly. The IRS will contact a current employer and let them know that your wages will be garnished. Your employer is then required to take a portion of your pay and send it directly to the IRS.
Is there a limit on how much of my wages the IRS can take?
The short answer is no, but the IRS does have national guidelines they try to follow regarding the cost of living for a particular area. In most cases, the IRS will try to leave you with enough money to pay your expenses, but this is an inexact science at best. The bad news is that the IRS can garnish up to 80 percent of your wages until you have satisfied your tax debt. In other cases, the IRS may look at your checking and savings accounts and could initiate a bank levy as well.
If I have satisfied my tax debts, how do I stop my wages from being garnished?
You will need to take several steps to have the garnishment of your wages halted. First, make sure all appropriate tax returns have been filed with the Internal Revenue Service. When the agreed upon amount has been paid to the IRS, you or your designated representative can contact the IRS to have the garnishment released. The quickest way to have the garnishment released is to have the IRS fax a release to your company’s payroll department. Depending on where you are at in your pay cycle, a release from the garnishment should take no more than one payroll period to go into effect.
Are there options that I can pursue other than a wage garnishment?
If you retain the services of an tax attorney or a tax professional, you can have them put a hold on your garnishment while they attempt to negotiate a settlement or other tax solution for you. This may include some other type of payment plan such as an Offer in Compromise and will depend on your unique financial situation.
Types of IRS Tax Debt Relief
The worst thing a taxpayer can do if they have a debt owed to the IRS is to ignore that debt. Communication is essential to resolving the issue in the most timely and least financially burdensome way possible. Although the IRS takes a hard line overall when it comes to collecting taxes, the agency does offer several tax solution options and repayment plans to make the process more accessible for people having trouble dealing with their current tax situation.
How do Installment Agreements Work with the IRS?
Much like making a car or a house payment, with an IRS installment agreement, you can meet your tax debt obligation by paying down the amount you owe over time through monthly payments. To be eligible, you must first file your income tax return. If you do not pay the full amount, you will be sent a bill. This bill should contain information of how to contact the IRS to set up an installment plan agreement.
If you are a personal taxpayer and owe $50,000 or less, you can apply for an Online Payment Agreement. The limit is $25,000 if you are a business. If you owe back taxes for more than these amounts, you must make your request in writing by filing Form 9465, Agreement Request and a Form 433, Collection Information Statement.
There are several types of installment plan agreements you can apply for:
- Guaranteed Installment Agreement – This is for people who owe less than $10,000, have paid all taxes due in the previous five years, have not had an IRS installment agreement in the previous five years, and can pay the full amount within three years.
- Streamlined Installment Agreement – You must pay the full debt within 72 months. There are two options, one for debts under $25,000, and another for tax liabilities for $25,001 to $50,000. You must agree to pay with a direct debit or payroll deduction.
- Partial Pay Agreement – This is appropriate when you cannot meet your full tax debt obligation within the allotted time frame. You make payments until the collection period expires. Another viable option for people in this situation is to explore the submission of an Offer in Compromise.
- In Business Trust Fund Express Agreement – For businesses that owe up to $25,000 and can pay the tax debt down in 24 months or less.
- Routine Installment Agreement – For people who don’t meet requirements of other installment agreements, this option is still a possibility.
Key Questions: What are some important things to know about tax debt payment plans?
If I have entered into an installment agreement with the Internal Revenue Service, will they still place a tax levy on my wages or my home?
Generally speaking, the IRS will not place a tax levy on your wages or your residence in you have an installment agreement in place. However, in some instances, to better secure their interests, especially when other creditors are involved, they may put a lien on your home.
What happens if I miss a payment as part of my repayment plan?
If you miss a payment, you will be considered in default and that could lead to the IRS reneging on their agreement with you. Not filing any subsequent income tax returns could also put you in default as well, also placing you at risk with the termination of your agreement.
Can I still get a tax return refund if I am participating in a tax debt installment plan?
If you owe any past due tax amounts, regardless of whether or not you are participating in an installment plan, you may not get all of your refund back. This can include any past due amounts for state and federal taxes, child support or student loans. If you do not have a federal tax debt and you are due a refund but you have a state tax debt, your federal refund may be garnished to pay your state tax debt.
What should I do if I am in danger of defaulting on my tax debt installment plan?
If you think you are close to not being able to make your scheduled tax debt installment payment, contact the Internal Revenue Service immediately. You may be able to work out an agreement with them so that they will not take collection enforcement actions against you. If you do default, you may be able to have your agreement reactivated by paying reinstatement fee.
What is an IRS Offer in Compromise (OIC)?
If you can demonstrate that paying your taxes in full will create an “extraordinary hardship” and can meet other strict requirements, you may be able to take part in the IRS Offer in Compromise program. The OIC Program allows a taxpayer to make a settlement offer to the Internal Revenue Service for an amount that is less than what is owed. Participants in this relief program agree to pay a portion of their debt immediately or in short-term installment payments and the IRS agrees to forgive the remaining outstanding balance.
Frequently Asked Questions about Installment Agreements
Monthly installment agreements are the most common way of satisfying a debt with the IRS. Recent changes in how agreements are administered have increased the amount to $50,000 that a person can owe when requesting to be put on a payment plan. In addition, the amount of time a person can make payments has also been extended and is now 72 months from the previous 60 months. In some instances, if a person owes more than $50,000, the IRS may still negotiate terms, but the amount of financial documentation required will increase significantly and the chances for approval will be more difficult to obtain.
While IRS installment agreements are still the preferred choice for most people, they do come with certain conditions that participants should know about. The biggest of these is that if you do take part in an installment plan, penalties and interest will still continue to accrue. It is not uncommon for this amount to be as much as 10 percent of the original amount that is added per year. You must also make sure you stay current with all tax returns and documents due to the IRS. If you are self employed this also means you must keep paying quarterly estimated taxes even while you are on an installment plan.
Is there a fee to participate in installment plan programs?
Yes. Fees to set up an installment plan program have recently changed, effective January 1, 2017. The following amounts are now in effect.
|Fee as of|
January 1, 2017
|Regular Installment agreement – set up by telephone or at IRS office – payments made by other than direct debit.||$225|
|Regular Installment Agreement with direct debit||$107|
|Low Income Installment Agreement||$43|
|IRS Installment Agreement Online – payments made by other than direct debit||$149|
|Online Payment Agreement – direct debit installment agreement||$31|
|Restructured or reinstated installment agreement||$89|
|Restructured or reinstated low income installment agreement||$43|
What is the tax resolution process if I owe more than $50,000?
As part of it’s Fresh Start program, Individuals and businesses with tax debts of less than $50,000 should be able to set up a repayment program of up to 72 months with few problems. However, those taxpayers more than $50,000 must enter into a negotiation process with the IRS. To begin the process, you will need to submit IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The IRS will use this information to determine how much you should be able to pay. There is no set formula and the amount you end up paying could differ, depending on the individual IRS collector’s analysis of your information. One possible strategy you can take is to propose an amount you think will fit your budget and submit this proposal when you turn in your 433-A form. Don’t fall into the trap of making an offer that is beyond your means as a way to get your proposed plan approved. It is nearly impossible to renegotiate a monthly amount once a repayment plan has been approved.
What paperwork do I need to complete to set up an installment agreement?
Depending on how you want to repay your debt, you will need to submit certain kinds of IRS installment agreement forms. For a direct debit installment agreement, you will need to use Form 9465. For a payroll deduction agreement, you will need to submit Form 2159.
How long does it take to have an IRS installment agreement request approved?
Depending on your particular circumstances, it could take several months of review before you know if your repayment plan is approved or not. While you are waiting for approval, make sure you stay current on submitting tax returns. Also, if you are a business, make sure you continue to make payroll taxes as well.
How do I contact the Internal Revenue Service for more information or to make an installment agreement request?
For more information or to start the process of setting up an installment plan, if you are an individual you should call the IRS Installment Agreement phone number at 800-829-1040. If you are a business, the number to call is 800-829-4933. Before you call, make sure you have your important financial information available, including pay stubs, mortgage statements, rental agreements, utilities payment information, car payment information and anything else you might need to substantiate your request.
Can the IRS change or revoke my installment agreement after it has been approved?
In certain instances, the answer is yes. Normally, the IRS is bound by the agreement, unless they discover you lied on your application or in negotiations, you miss a payment, you didn’t file subsequent tax returns, or your financial situation changes dramatically for the better or the worse.
Qualifying for the OIC Program:
You must make a reasonable offer based on your “true ability to pay.”
You cannot be involved in an ongoing bankruptcy.
Your tax filings must be current, complete and up-to-date. You cannot owe back taxes.
If you can make payments through any of the installment plan programs, you will not be qualified for an OIC.
When you submit an OIC application, you must include detailed financial information to the IRS, including all liabilities, assets, expenses and future earnings potential. It is important to note that submitting an application does not guarantee acceptance of whatever offer you make.
The IRS will review the application to determine if the amount offered is the most they can expect to collect from a taxpayer in a reasonable timeframe. In some cases as part of an IRS offer in compromise, a taxpayer can request a temporary delay of collection. However, doing so runs the risk that the IRS will label the account as “currently not collectible.” When this happens, the IRS may delay tax collection activities until there is an overall improvement in a taxpayer’s financial situation, denying debt forgiveness participation.
To determine if you may be eligible for the OIC Program, the IRS has created and OIC Pre-Qualifier Tool to assist in determining whether or not a person may be able to take advantage of this program. The tool will also help taxpayers prepare their proposal as well. It is located at https://irs.treasury.gov/oic_pre_qualifier/ .
Key Questions: What are the most important things to know about financial hardship situations?
What if I am overwhelmed by a financial situation and under no circumstances able to make tax debt payments to the Internal Revenue Service?
Unfortunately, sometimes life events take place that can completely overtake a person’s ability to meet their tax debt obligations. The IRS understands that these things do happen and as such, can place an individual on uncollectible status. To do so, a person must be able to prove that collecting a tax debt would create a severe financial hardship. This is also known as status 53 or CNC Status (Currently Not Collectible). If approved, IRS collections will temporarily stop.
If I am placed on uncollectible status, will my tax debt obligations be removed?
No. You will still have to address your tax debt problem at some point, but under uncollectible status, you will be able to add several months of time to deal with your financial situation.
How does the IRS determine if a person should be placed on uncollectible status?
The IRS works with people on an individual basis and there is no single or specific form to submit to start the process. Each case is considered differently. To be considered, you will need to submit extensive financial information about yourself and do the best you can to prove that you would be placed in an extreme financial burden if you were required to immediately resolve your tax situation.
Are there better options than attempting to claim uncollectible status?
With uncollectible status, you will still have to pay your full tax burden. Your tax situation will not change, there will be no debt forgiveness, and it will only be delayed. A better option may be to seek out an Offer in Compromise with the Internal Revenue Service. The OIC Program will allow you to pay something less than the full amount due, creating a better tax solution for you in the long run.
OIC Program Submission and Review
In addition to submitting the appropriate forms, you will need to pay a $186 application fee as well as a non-refundable initial offer payment. Both the application fee and the initial payment are non-refundable.
On the Offer in Compromise Form 656, you must indicate if you are going to make a single lump sum payment or a periodic payment. A lump sum payment will require an initial payment of at least 20 percent of the current tax bill. After acceptance, the taxpayer must pay the remaining balance off in no more than five additional payments within the following five months. For periodic payments, you can submit the first monthly payment with your application, but you must continue to make monthly payments while your OIC application is considered. Upon acceptance, a taxpayer will be given the option to keep making payments for up to 24 months until the debt is satisfied.
Taxpayers who meet Low Income Certification guidelines do not need to pay the application fee, make an initial payment, or make monthly payments while their application is being considered.
There is no guaranteed timeframe for the IRS to decide if they will accept an OIC. While a person’s application is being considered, other collection activities will continue in full force, including the possibility that a lien may be filed against the taxpayer. Penalties and interest will continue to accrue as well. Taxpayers are also required to stay current with any tax payments as part of the OIC process, or their offer could be denied.
If an offer is accepted, a taxpayer is required to meet all the terms and conditions of their OIC, including all tax filings and payments, for the following five years. If they do not meet this obligation, their OIC could be considered in default. When this happens, the taxpayer becomes liable for their full tax amount due, plus interest and penalties, instead of the partial settlement offer.
Key Questions: What do I need to know about tax liability debt settlement options that may be available to me?
I have decided to work with the IRS and pay my tax obligation by setting up a repayment plan. What are the most important things to remember that will allow me to be successful in choosing this option?
First and foremost, by choosing a repayment plan, you must make every payment on time and in the full amount due. If you don’t, you may be considered in default and that would trigger harsh consequences for your financial situation. Second, because there are several possible repayment plans, make sure you choose the one that fits your particular situation and that you are confident you can live with the terms outlined in the agreement.
I want to resolve my tax situation through the OIC Program. Will this have a negative impact on my credit?
The good news is that participating in the OIC Program does not have any impact on your credit. Credit services such as Experian and TransUnion will have no indication that you have submitted an offer or that you are seeking tax debt forgiveness. The only thing that will be reported to the credit services is that a tax lien will be placed on your assets until your OIC offer has been accepted and paid. After that happens, you should contact the credit services and make sure the lien has been has been recorded as being released on your credit files.
What if there is simply no way I can afford to make any kind of tax payment to the IRS at the present time?
Although it is a last resort, if you can supply appropriate documentation to the Internal Revenue Service, you may qualify for uncollectible status. Under this scenario, your taxes are still due at some point, but the IRS will defer payment until such time that you are more better able to repay your tax debt. Generally, you are given several months to try and right your financial situation and then the IRS will seek an update to see if you can meet your obligation.
What To Do If Your Offer in Compromise is Rejected
If your Offer in Compromise is rejected, you can file an appeal within 30 days of the decision. There are both advantages and disadvantages in going through the appeals process.
The good news is that appeals officers generally have more discretion when it comes to resolving OIC matters. They understand that an appeal is the last step before litigation and will do what they can to resolve a situation instead of escalating it. Many appeals officers view their roles as mediators and attempt to reach compromise instead of extending conflict. Appeals officers are generally more seasoned and experienced IRS professionals, and with that experience at their disposal, they will be able to better understand valid arguments and make rulings more quickly with less interference.
The downside of the appeals process is that appeals officers will rely on the current finding as the default position, and the taxpayer making the appeal will need to present compelling evidence while a decision should be overturned. While experience can work in your favor, at times that experience will also work in favor of the IRS which can readily spot arguments that are without merit. In addition, because they have heavy caseloads, don’t expect extended examinations of your tax situation. Appeals officers must make quick decisions and move on.
Next Steps to Determine Your Eligibility for Tax Debt Relief
If you’re looking for a fresh start and think you might benefit from going through some form of tax relief program, it is generally in your best interests to contact a tax attorney who specializes in this type of situation. Tax debts and tax laws are complicated matters, and you will only get one chance to go through a tax resolution process, so legal help is a wise investment in virtually all cases.
If you’re just exploring options for your financial situation at this point, you can discuss repayment plans and relief programs with the Internal Revenue Service by calling the number on a notice you have received or by calling 1-800-829-1040.