An installment agreement is a payment plan for your tax bill. It’s an agreement you reach with the IRS that permits you to pay your tax bill in equal monthly installments over a period of years. In order to qualify, you must owe less than $50,000 in combined tax debt, interest, and penalties. If you owe business taxes, you must owe less than $25,000.
You must also be up to date on all your tax filings and, if you are a business owner, you cannot be behind on payroll taxes.
Your installment agreement is based on your income and the amount of taxes owed. A professional can help you negotiate a fair arrangement.
An offer-in-compromise is another agreement you can reach with the IRS. This option is even more favorable, because it could actually lower your tax bill.
Not necessarily. You have the option to negotiate an offer-in-compromise, in which you offer to pay the IRS an amount that is less than your full tax bill. In some cases, you can also negotiate to have any fees and penalties waived. You may negotiate an installment agreement as part of the OIC, or make one lump sum payment to the IRS.
However, it’s important to note that, after March 27, 2017, you must have filed all required tax returns to be considered for an OIC. Additionally, an OIC is not likely to be accepted unless the offer is equal to or greater than the total of the taxpayer’s assets, which can be seized by the IRS. These assets include real estate, automobile, bank accounts, and anticipated future income, minus basic living expenses.
The IRS may accept an OIC in three separate circumstances. If there is doubt as to liability the IRS may accept an OIC. This means there is a dispute as to whether the tax debt is accurate and correct. If the IRS doubts the amount is fully collectible, the IRS may accept an offer that is in line with what they taxpayer can reasonably afford. Finally, the IRS may accept an OIC if the taxpayer can prove that payment in full would create an economic hardship or would be unfair due to exceptional circumstances.
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.
A tax lien represents “the government’s legal claim against your property when you neglect or fail to pay a tax debt,” according to the IRS.gov website. It is a document filed by the IRS or another collection organization (such as the state tax department). The IRS may place a lien on your real estate, personal property, or other financial assets, such as a business.
If you should ever sell that asset, the IRS can seize the money from the sale to cover unpaid tax debt. Keep in mind, a tax lien is not a worst case scenario, because if you never sell the property, the IRS can’t collect any money from its sale. Learn more about tax liens, and what to do if you receive a Notice of Tax Lien from the IRS in this article.
A tax levy is more serious than a tax lien. A tax levy gives the IRS or other agency permission to seize your assets, including your real estate, personal property, financial assets, or your business, to cover unpaid taxes. If you receive a notice of a tax levy, it’s crucial to contact a tax attorney immediately to discuss your options.
If you receive a Notice of Tax Lien or a levy, stay calm. There is always a way out, as long as you act quickly and do the right thing. Begin by contacting a tax professional who can help you explore your best options. You may be able to negotiate a direct debit installment agreement with the IRS. As long as your tax debt is less than $25,000, once you’ve made three consecutive on-time payments, you can file a withdrawal of your notice of Federal Tax Lien.
You can also stop a tax levy by negotiating an installment agreement of filing an offer-in-compromise. A tax professional can help.
IRS wage garnishment is one of the most serious actions, short of imprisonment, that the IRS may take to collect unpaid tax debt. If the IRS files a wage garnishment against you, they take a percentage of your pay, before it even reaches your bank account, until your tax debt, associated penalties, and fees are paid off. The IRS can garnish as much as 50 percent of your wages, leaving you without enough money to live on or to pay other debts.
Even wage garnishment, however, doesn’t have to be the end of the world. There are a number of ways to stop wage garnishment, including negotiating a settlement agreement or an offer-in-compromise with the IRS. A tax professional such as a tax attorney or a tax relief firm can help you navigate these waters and reach an arrangement you can live with.
If you fail to file your tax returns on time and you owe the IRS money, or if you fail to pay your taxes on time, penalties and fees will be assessed. The IRS will attempt to collect the debt you owe. Failure to file your taxes could even result in a fine of up to $25,000 or a prison sentence of up to five years.
It’s always best to meet all IRS deadlines or file an extension and, if necessary, communicate openly about your inability to pay your taxes.
Business owners have many of the same options as individual taxpayers, including negotiating a settlement agreement, an offer-in-compromise, a penalty abatement, or a 45-day extension. A tax attorney or tax debt relief firm that specializes in business taxes can help you.
You can file for “Innocent Spouse Relief” using IRS form 8857 and the IRS may determine that you are not responsible for your spouse or ex-spouse’s back taxes. The paperwork to file is complex, and your spouse or ex-spouse will be notified that you filed the form. It’s best to seek professional tax help before endeavoring to apply for innocent spouse release.
In many cases, tax debt is not included in a bankruptcy. In addition, a bankruptcy stays on your credit report for 10 years and can make it more difficult to finance a vehicle, obtain a mortgage, rent an apartment, or even find a new job. We do not usually recommend bankruptcy to get out of debt, including tax debt.
However, if your income tax debt is at least three years old, and meets other requirements, you may be able to include it in a Chapter 7 bankruptcy filing.
If you owe up to $250,000 in taxes, or perhaps even more, you may qualify for tax relief. A tax relief firm can help businesses or individual tax payers.
If you can pay the tax bill, including all fees and penalties, by the due date, your best course of action is to pay it.
But if you don’t have the money to pay your tax bill in full, do not ignore it! Ignoring a tax bill or collection letter will only cause fees and penalties to continue adding up. With time, unpaid tax bills can lead to wage garnishment, an IRS tax lien, or a levy. The IRS may also seize your personal or business assets (depending on the taxes owed). In a worst case scenario, unpaid taxes can lead to jail time.
It’s always best to stay in communication with the IRS and understand that you have options. Some people decide to negotiate with the IRS on their own. Here at Solvable, we don’t recommend that. You have other options, including hiring a tax attorney or a tax relief firm to help you negotiate an installment agreement, an offer in compromise, penalty abatement, or another legal way to help you manage your tax bill.
When you have a face-to-face meeting with a tax debt relief firm, you can be prepared by gathering any pay stubs, bank statements, utility bills, credit card bills and information about other debts, mortgage statements or cancelled rent checks, investment documents, and any other information that can be used to determine your income, living expenses, existing debt, and how much you can reasonably pay the IRS.
Additionally, you should bring past tax returns, enabling the tax relief firm to review your case and assess the accuracy of your tax filings.
The U.S. tax code is composed of nearly 10.1 million words. Sifting through all the jargon to find the information that can help you reduce your tax debt is virtually impossible. Tax attorneys and tax relief firms understand the right forms to file, the right language to use, and the right steps to take in order to negotiate a settlement, reduce penalties and fees, or even reduce your overall tax debt.
The odds of a favorable settlement increase dramatically if you have a tax professional to negotiate with the IRS on your behalf.
Additionally, beginning in April 2017, the IRS will assign one of four private-sector collection agencies to collect some back taxes. This leaves taxpayers open to scams by third-party collection agencies pretending to reach out on behalf of the IRS. If you receive a collections letter from the IRS or a third-party that appears to be acting on behalf of the IRS, it’s important to speak to a tax attorney, who can guide you on the best next step.
Reputable tax debt relief firms typically don’t request upfront fees, but will collect a portion of the money you’ve saved with a tax settlement. Tax attorneys may charge upfront fees for their services, but if you are facing a tax levy or wage garnishment, and your tax debt is substantial, hiring a professional is better than the alternative of having your assets or paycheck seized by the federal government.
You can save substantial amounts of money with an offer-in-compromise agreement, including having penalties, interest, and fees waived. However, a reputable tax relief firm will not make promises about how much money they can save. The tax professionals will want to review your situation thoroughly in a face-to-face meeting.
Even more important than the cost savings, though, is the peace-of-mind you’ll receive from facing your tax debt head-on and knowing there is a professional you can trust on your side against the IRS.