Tax resolution and tax relief are professional services designed to help address the complicated financial hardships resulting from IRS debt. Many taxpayers tend to ignore the problem and only seek help when the IRS has lost all patience and decided to recover their unpaid taxes forcibly.
More often, forced recovery takes the form of a bank levy or tax lien on your property. Fortunately, there are many tax resolution methods that you can use to settle your debt at the state, local, and federal levels. Review these options to discover which one applies to your situation, then ask a professional CPA for more information.
Installment Agreement
Under an installment agreement, you formally agree to pay the entire amount of your debt in flexible monthly installments for up to six years. This method allows you to pay in small, manageable amounts so that the debt is not overwhelming. Once you have fully settled the tax debt, the IRS will lift any federal tax liens filed before the agreement.
Partial Pay Installment Agreement
A partial pay installment agreement works in the same manner as a regular installment agreement. However, it allows you to pay much lower monthly installments than you would in a standard installment agreement.
If your financial situation does not change, then you will continue to pay reduced monthly installments until the expiration of the statute of limitations (often after ten years). Once you qualify for the partial pay installment agreement, you will be subject to a rigorous financial review every two years. Based on the IRS findings, it has the discretion to increase your installment amounts if you have had some increase in income.
Currently Not Collectible Status
As a taxpayer, you can have all collection activities halted if you are under CNC (Currently Not Collectible) status. The IRS only triggers this status if your expenses exceed your income. They look at national standards to determine whether you can afford your necessary living expenses. Your status will be reviewed periodically, but if you remain compliant, you can avoid levies and stay in CNC until the balance you owe expires.
Innocent Spouse Relief
With innocent spouse relief, you are relieved of any tax debt incurred due to your spouse or ex-spouse neglecting to pay their joint IRS tax debt. The IRS will determine if you are eligible however, innocent spouse relief is often one of the most challenging solutions to qualify for. Proving your innocence in the tax debt requires documented proof, which can be hard to acquire. Getting a tax attorney’s assistance can make the process smoother, depending on your circumstances.
Offer in Compromise
An offer in compromise (OIC) allows you to pay a lesser amount to fulfill the entire tax debt. During the approval process, the IRS investigates your financial situation and compares your total debt to your current financial status. If the IRS accepts you into the OIC program, you will be subject to continuous review of your financial situation to ensure that you cannot afford to make larger tax payments.
Bankruptcy
Filing for bankruptcy is a viable option if you need to discharge your tax debts fully. However, this is only possible if your debts qualify for discharge and you are eligible for Chapter 7 bankruptcy.
You can wipe out tax debts for federal income taxes under Chapter 7 bankruptcy only if you meet all the following conditions:
- The taxes owed are income taxes
- The debt is at least three years old
- You filed a tax return
- Your debt is reviewed by the IRS 240 days before filing
Additional Points to Consider
Here are some extra tax resolution options you could consider:
- Statute of limitations: The statute of limitations for the IRS to collect your past-due tax is ten years after they have assessed your tax liability. However, this method is rarely effective since the IRS will likely collect unpaid taxes through a tax lien or levy. It can only work if you have no assets, property, or wages that the IRS can go after for the entire period of 10 years.
- Penalty abatement: The IRS and some state agencies often allow penalty abatement pleas for fines imposed on your tax debt. Many penalties can grow to staggering amounts, so the tax agency can occasionally reduce or remove such penalties for a good cause.
- Appeals: The office of appeals is a separate, independent IRS office where you can direct your disagreements concerning the application of tax laws for a fair resolution. Appeals can resolve tax disagreements without a formal trial or having to go to court.
- Filing Past Due Returns: You can settle your tax debt by submitting your past due returns. The IRS usually imposes interests and penalties on tax due from missing returns, so you must submit penalty abatement. It is also possible that you might be eligible for a refund that you missed out on due to missing returns. The only way to find out is by gathering your financial documents for the missed year and filing past due returns.
Enlist the Help of a Professional
Although this list is not exhaustive, it covers the key tax resolution options that tax professionals implement to help taxpayers settle their tax debts. By working with an experienced tax professional, you can receive the best tax resolution possible and get out of trouble with the IRS.
Do you have first-hand experience with tax resolution options? Feel free to share your thoughts in the comments below!