Why do people get behind in paying their taxes? There are many reasons it happens – procrastination, illness, divorce, loss of job and/or income – these are probably the most common reasons we see. The IRS knows this and offers some settlement options for taxpayers who have experienced financial hardship. Although anyone can represent himself to negotiate a settlement with the IRS, it can be a painstaking and time-consuming process.
1. Full payment – This is the fastest way to resolve any back tax issue, is to send payment in full to the IRS. If you are able to do this, it should be done as soon as possible to avoid accruing further interest and penalties on you account.
2. Installment agreement (IA) – If you are unable to full pay your tax debt, you can work out an Installment Agreement to repay your tax debt to the IRS. This allows the taxpayer to repay his/her debt in manageable monthly payments. Keep in mind, the IRS will require some financial documentation in the process of negotiating your payment plan since an Installment agreement is based on comparing income to expenses. Interest and penalties will continue to accrue while payments are being made to the IRS.
3. Streamlined Installment Agreement (SIA)– A streamlined installment agreement was designed for the taxpayer who owes less than $25,000 in individual income taxes to the IRS. While the streamlined Installment Agreement is also a monthly payment made to the IRS, the streamlined installment agreement is based on how much your tax liability is. You will qualify for a SIA if your tax debt is less than $25,000 and the liability does not expire in less than five years. As with a traditional Installment Agreement based on financial ability to pay, interest and penalties will continue to accrue while payments are being made to the IRS.
4. Offer in Compromise (OIC) – An Offer in Compromise, or OIC, is a program that benefits both the taxpayer and the IRS. The taxpayer submits an offer to the IRS detailing what they will pay, based on what they can afford to pay. The OIC program requires the taxpayer(s) to provide full disclosure of financial to prove they would not be able to repay the IRS. The IRS benefits by gaining at least a portion of the taxes owed, as well as getting a compliant taxpayer back into the system. A taxpayer submitting an Offer in Compromise must be current with his/her current tax obligations by filing and making the appropriate payments to the IRS in addition to meeting any payment terms of the Offer in Compromise.
5. Currently Not Collectible (CNC) – If you are truly in dire financial straits, you may qualify for the IRS’ Currently Not Collectible status. If you qualify, the IRS will not pursue collections from you during the period you remain in CNC status. Like the Offer in Compromise, the taxpayer must be prepared to show documentation of your financial situation.
6. Innocent Spouse – In rare cases, one spouse may be considered an innocent spouse when the other spouse files a joint tax return and there is a tax liability without the one spouse’s knowledge. The burden of proof lies on the party submitting the Innocent Spouse Request (the innocent spouse), but if proven innocent, it eliminates the debt, interest and penalties from the Innocent Spouse’s taxpayer account. The spouse who filed the return will become solely liable for the taxes, interest and penalties. The Innocent Spouse must document that he/she did not have any knowledge of the tax liability, nor did the individual benefit from the items generating the tax liability.
7. Bankruptcy – The most extreme solution, a last resort for most people, would be to attempt to get your back taxes discharged in bankruptcy. Typically, more recent tax liabilities and payroll taxes cannot be discharged. You should talk to an attorney specializing in bankruptcy to see if this is an option for you.
8. Just wait it out – The statute of limitations on tax liabilities is ten years. If your back tax debt is from many years ago, you may be close to the point where the IRS can no longer collect. It is very important to note that certain things may extend your statute of limitations, so this option is generally not recommended. Also, any time that you do not have a resolution in place, you could be subject to enforced collection activity, meaning that the IRS could levy your wages or bank account. This is true even if you only have one month left on your collection statute. Unless advised by a tax professional, do not assume that the liability will go away.
If you are uncertain or even afraid of dealing with the IRS, the experienced tax team at JK Harris can help you find the settlement that will work for you. Call us today for a free consultation.