Are you drowning in back taxes and unable to pay what you owe? Have you considered a tax settlement to help you get a handle on your finances?
While it’s true that the IRS appears to be a big, scary, all-powerful entity that could (in theory) take your money, your assets, and even your home, wage garnishment and tax levies are actually the last resorts to collect unpaid tax debt.
In reality, the IRS is often happy to reach an agreement that gives the agency a portion of the tax money owed and allows the IRS to close out your case. Such an agreement is called a tax settlement. (And the same goes for state tax debt. Your state tax organization is most likely willing to listen to a settlement offer, too.)
A tax settlement may allow you to settle your case for less than the original amount of money owed. You might also negotiate for a more favorable payment plan.
You are legally permitted to negotiate an offer-in-compromise by yourself. But the odds are much higher if you enlist legal help in filing the OIC. In 2014, the IRS accepted 40.7 percent of the OICs it received. However, those filed with the help of a tax attorney often have an acceptance rate much higher than the national average.
Making an offer-in-compromise requires showing all your income, assets, expenses, and other figures that demonstrate your ability (or inability) to pay the full amount. The paperwork required to file an OIC is complex, and a tax attorney can help you fill it out accurately in order to increase the odds your offer will be accepted.
Doubt-as-to-liability simply means that you may not owe as much in taxes as the IRS claims. The tax examiner may have made an error in assessing your tax liability, or there may be additional evidence that’s come to light that shows you don’t owe as much as the IRS says. A tax professional can help determine if there is doubt-as-to-liability, and help you prove it to the tax collection agency if there is.
In some cases, the IRS will waive penalties and interest owed on a tax bill that is paid late. There are a number of reasons taxpayers can file for a penalty abatement. These include:
Unfortunately, these methods are usually not successful. The IRS is most likely to offer a penalty abatement if it is your first time ever paying a tax bill late. You may be eligible for a first-time penalty abatement as a business or individual taxpayer if you have no penalties for three prior tax years, you’ve filed all required returns or filed for an extension, and you have paid, or made an arrangement to pay the taxes due. The IRS may also waive any interest that has accrued on the penalty.
In some cases, an individual can fill out IRS form 843 and file for a first-time penalty abatement. If there are multiple late payments and the taxpayer is hoping to prove reasonable cause for their late payment and receive penalty abatement, the best chance of success lies with hiring a tax professional to help.
It costs the IRS money and human resources to try to collect unpaid tax debts. In recent years, IRS budget cuts have resulted in a 21 percent reduction in Automated Collection Service representatives and a 28 percent drop in Field Collection personnel who attempt to collect unpaid tax debts. Additionally, it costs the IRS an average of 35 cents to collect $100 in taxes—presumably more to collect unpaid tax debt. If you approach the IRS and attempt to make an offer, the IRS sees this as an opportunity to collect some money, rather investing more money in your collections case.
However, this scenario may be changing. Beginning in April 2017, the IRS has hired four outside agencies to begin collections of unpaid tax debt. It’s important to act now, before it becomes easier for the IRS to collect their unpaid tax debt, which could make the organization less willing to reach a settlement or reduce penalties.