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The IRS offers tax debt reduction plans that help taxpayers and businesses get a reduction in back taxes. Many people erroneously believe that tax debt reduction plans are open for all. The truth is that IRS tax debt reduction plans are only for those who cannot afford to pay their full tax debt. If you are experiencing financial hardship, you can consider applying for IRS tax debt reduction programs such as the IRS Partial Payment Installment Agreement (PPIA) or Offer in Compromise (OIC). These plans allow you to pay less than what you owe in back taxes.
The IRS has many programs for resolution of tax debt. Installment Agreements are one of the most popular because most taxpayers can qualify for them. Partial Payment Installment Agreement is an Installment Agreement plan that allows tax debt reduction. Using this plan, taxpayers who are in financial difficulty and cannot pay their entire back taxes can pay less and permanently resolve their tax debt. Under the Partial Payment Installment Agreement, you can pay the reduced amount in installments.
After you apply for the Partial Payment Installment Agreement, the IRS analyzes your ability to pay to determine how much of your tax debt you can pay. When conducting the financial analysis, they look at your income, property, and assets to judge your paying capacity. Depending upon that, they reduce the back taxes amount to what you can afford.
Along with this major criteria, you also need to file all your past tax returns before you apply for the Partial Payment Installment Agreement program. The IRS rejects applications for PPIA if they find that there are unfiled tax returns.
An Offer in Compromise is another IRS tax debt reduction plan that allows you to pay less than what you owe in back taxes. Depending upon your financial condition, the IRS reduces your back taxes to what you can afford to pay.
An Offer in Compromise is only for those who are financially strained and cannot pay their full tax debt. Unscrupulous tax services promise tax debt reduction to anybody who would hire their services. Beware of such services when you are looking to hire help for tax debt reduction.
After an Offer in Compromise application reaches the IRS, they conduct a financial analysis of the applicant to determine his/her ability to pay. Just like in Partial Payment Installment Agreement, an Offer In Compromise too, the IRS looks at your income, equity in assets, and expenses to determine your ability to pay. If they find that you cannot pay your tax debt using your income or equity in assets, then they reduce the amount to what you can pay.
If you cannot pay any amount in back taxes, the IRS is likely to put you under the Currently Not Collectible status. In this case, the agency places collection actions on hold and waits for your financial condition to improve so that they can collect the back taxes.
The IRS can only collect back taxes 10 years from the date of non-payment. This 10-year collection period is called the Statute of Limitations. Usually, if they cannot collect back taxes until the expiry of the Statute of Limitations, they stop the collection and close the case. Therefore, in tax debt collection, the IRS looks at the Statute of Limitations to see if they can hope to collect back taxes before the expiration of the Statute of Limitations. In rare cases, the IRS extends the statutory period for the collection.
Taxpayers that cannot qualify for IRS partial payment plans can use an Installment Agreement to resolve their back taxes. The IRS offers a variety of Installment Agreements, namely:
In all these plans, you pay your tax debt amount in installments. The amount to pay in each installment depends upon your paying capacity as ascertained by the IRS. Among the different Installment Agreements, only the Partial Payment Installment Agreement allows tax debt reduction.
If you find that you cannot qualify for the Partial Payment Installment Agreement, you can explore the other Installment Agreements and resolve your back taxes by paying your full tax debt in installments. Again, the amount you pay in installments depends upon your paying capacity.
Before applying for any IRS tax debt resolution plan, it is important to know about the penalties and interest the IRS charges on back taxes.
From the day of non-payment of taxes owed, the IRS begins to charge penalties. For non-filing of a tax return, the penalty charged is 5%. For non-payment of the taxes owed, the penalty charged is 0.5%. Along with penalties, the IRS charges interest on back taxes as well.
The penalty is charged each month, and interest is compounded daily. Every month that the tax debt remains unpaid, the total amount owed keeps growing. If left unpaid for months or years, the amount grows substantially, making it even more difficult for the taxpayer to pay it.
Hiring a tax attorney or a tax debt resolution company can help immensely in getting the most beneficial resolution. A professional looks at many ways to save you from paying more to the IRS, such as penalty abatement, where the IRS reduces or waives the penalty charged on back taxes.
A tax attorney can negotiate the terms and conditions of the agreement to make it more favorable for you. Especially in tax debt reduction cases, it is best to hire a qualified and honest tax attorney or a tax debt resolution service that can get you the most back taxes reduction while taking care of IRS notices and collection actions. It will make your journey to resolution smoother and get you the most benefits possible.