Top 5 Options for Settling Back Taxes
Millions of Americans each year face the unsettling reality of finding out they owe back taxes. This article describes the top five options a taxpayer may have to pay back taxes and be in "compliance" with the Internal Revenue Service.
If you owe back taxes, as many do for a variety of reasons, you have several options for getting back in the good graces of the IRS. It’s best you understand all available options to see what fits your unique tax situation before taking action.
There are a few important things to consider before deciding what debt settlement method to use:
- Tax amount owed
- Greatest amount you can afford to pay
- Amount of liquid assets you have
- Ability to pay the amount in full if you just had more time
Filing back taxes can be tricky and there are a few guidelines you should follow to ensure it’s done properly. Some people choose to ignore the situation all together, hoping the IRS won’t discover they didn’t file their taxes. In the end however, the IRS will always come knocking and the longer you wait, the more desperate your situation will become. Ignoring the IRS or failing to file tax returns (from any year) will eventually lead to forced collections and potentially severe financial strain. Below are the 5 most common methods for addressing your tax burden before it gets out of control.
This is the easiest way to settle tax debts. With an installment agreement you will be required to pay monthly payments towards the tax amount owed in a period of less than 3 years. With this agreement you will end up paying more than the original amount owed but is a great option if you cannot afford to pay off the debt in full but can afford to pay it off over time.
Offer in Compromise
This option allows you to reach a “compromise” with the IRS on the tax amount owed – often for much less than the original amount. If you’ve ever heard the saying, "Settling for Pennies on the Dollar", this is what an Offer in Compromise is. It should come as no surprise this is the most difficult way to settle with the IRS. They have strict requirements to qualify for an Offer in Compromise which includes filing all your unfiled tax returns and making all required estimated tax payments. You are also ineligible if you’re in an open bankruptcy proceeding.
The purpose of an Offer in Compromise is to agree on an amount that works for both the tax payer and the IRS. Basically, this means the IRS will only settle if you can prove it will cost them more to try and collect the money then to negotiate a reduced settlement. This is a good choice if your total assets are less than the amount of tax debt you owe.
Buy More Time
If you need to buy more time to pay the total amount due it can easily be done by using your understanding of the IRS system to your advantage. Essentially, when taxes are unpaid it triggers the automated IRS notification system. Once this happens, the IRS will begin sending a series of letters before it begins the collection process. Typically the IRS sends an original assessment letter stating the amount of tax owed plus any interest and penalties. Next, it will send a series of four CP Letters (Computer notices noted by a CP number in upper right). Typically once you start receiving the CP letters you have 4 to 6 months before the IRS takes collection action if nothing is done on your part.
To delay the IRS and buy yourself more time, all you have to do is send a letter back in response to the assessment notice or CP notices and state that you can't pay the amount in full at the current time and ask for a 45 day extension. Once the 45 days is up and you haven't done anything, the process will begin again right where it left off and you’ll receive another letter. Repeat the same process as before but understand this will likely only extend your delinquency a few months. You must pay off the taxes owed before the IRS takes action against you so this option is only good for someone who may not have the money right away but knows they will have it in the very near future.
Getting “Currently Not Collectible” Status
The IRS may place certain delinquent tax cases in a “currently-not-collectable” (CNC) status after its agents have determined it no longer has the ability to collect the taxes from the delinquent taxpayer.
For example, let’s assume a taxpayer falls behind in filing their returns, paying taxes, or both. The IRS will eventually attempt to collect the taxes and/or missing tax returns through its notice process, by phone calls, or in-person visits. If these attempts fail, the IRS will begin enforced collection action which may include garnishing wages or seizing bank accounts and other assets.
If at any point during this process the taxpayer demonstrates the payment of back taxes would create an “economic hardship” on the taxpayer, the IRS may close the collection case by placing the taxpayer’s account in “CNC” status. In most cases, the IRS will not even consider this status until the taxpayer is in compliance and all missing tax returns have been filed. If the IRS does allow a case to be closed CNC, it will usually be re-opened and returned to active collection status if the taxpayer fails to file a tax return in the future, accrues a new tax liability, or the taxpayer’s financial situation changes sufficiently to allow payments to be made against the back tax debt.
It’s worth pointing out that CNC status is really a temporary solution and not an option for permanent tax relief. The tax is not forgiven or compromised, and interest and penalties continue to accrue.
Tax specialists are by far the best way to resolve back tax issues. These highly experienced and educated individuals understand tax law and have the most current information about what relief options may be available. They also provide the best chance of obtaining a reasonable Offer in Compromise and can help set up an installment agreement that will have you back in compliance with the IRS in no time.
William D. Truax has been helping people address their back taxes and other IRS compliancy issues for over 30 years. He is admitted to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court. Together with a team of fully licensed tax preparers and Enrolled Agents, Mr. Truax is able to handle even the most complex back tax situations.
If you need assistance or have questions about filing and paying your back taxes, please contact us today for a FREE consultation. The longer you wait, the more you may owe!
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