Help! I owe money to the IRS. What are my tax debt relief options?

November, 05 2019 by Arnold van Dyk, Esq.

Millions of individuals and business owners in America currently have unpaid IRS tax liabilities. The stress of unpaid taxes is often overwhelming, and the thought of tackling the debt is sometimes so paralyzing that you might end up doing nothing.

Now you have decided that you are ready to try and resolve your tax debt. But what are your tax debt relief options? Here are a few items to consider:

 

Before looking for a resolution, make sure all your tax returns are filed.

The IRS will not even entertain the idea of an installment agreement or settlement if you have unfiled tax returns. The first step for many people is to make sure all your back tax returns are filed. If you do not know which returns are not filed, you can obtain your account transcripts by visiting the following IRS link: https://www.irs.gov/individuals/get-transcript. Once you have all your tax returns filed, you can move on to the next step.

 

Make sure your tax withholdings are correct, or that you are making the correct amount of estimated tax payments.

This step is important because any IRS resolution will be predicated upon the condition that you do not owe any further tax liabilities in the future. If you do setup an installment agreement or qualify for an IRS settlement but end up having an unpaid liability, the installment or settlement agreement will automatically terminate. Make sure you complete a new Form W4 with your employer if your withholding needs to be corrected, or that you make timely estimated tax payments if you are self-employed or a contract worker. Estimated payments are generally due four times a year.

 

Attempt to enter into an IRS Installment Agreement.

You can attempt to enter into an IRS installment agreement in order to resolve your current tax liability. If you owe less than $50,000, the IRS will generally accept any installment agreement you propose if it will pay the balance of in 6 years or less. If you owe more than $50,000 or need more than 6 years to pay off your liability, then the IRS will ask you to provide a Financial Information Statement in order to determine how much you can pay monthly towards your tax debt. The financial information statement needs to be accompanied by financial information such as bank statements, paystubs, rental agreement, and other information to prove your monthly income and expenses.

Keep in mind if you enter an installment agreement the IRS will continue to charge interest on any unpaid liability. The larger your monthly payments the less your total interest paid will be.

 

Check to see if you qualify for Currently Not Collectible status (CNC).

If you can show the IRS that your monthly expenses are more than your monthly income and you are unable to make any payments to the IRS at the moment, you may qualify for CNC status. If you are on CNC status, the IRS accepts that you owe the balance but that you are currently unable to make any payments towards your balance. If you have assets, the IRS will likely file a federal tax lien to protect their interest, but they will suspend all other collection activity while you remain in CNC status. The status is generally reviewed either once a year or once every 2 years to see if you still qualify to remain in CNC status.

 

Determine if you qualify for an IRS Offer in Compromise.

You can attempt to settle the debt for less than the amount you owe through the IRS Offer in Compromise program. The IRS will take into account your monthly disposable income (Net of total income and IRS allowed expenses) as well as equity in all assets to determine if you qualify for an Offer in Compromise. Complete Form 656 to apply for an Offer in Compromise. In addition, the process requires that you provide financial information by completing Form 433(OIC). These two forms, along with all the required supporting documentation, then need to be sent to the IRS Offer in Compromise Unit, who will review your offer. In 2017, the IRS Offer in Compromise acceptance rate was only 40%. Because of the low acceptance rate it is always a good idea to use the IRS PreQualifier tool to see whether you may be eligible for an Offer in Compromise. Here is a link to the IRS PreQualifier tool: https://irs.treasury.gov/oic_pre_qualifier/

It is also suggested that you use a seasoned tax professional to assist you through the Offer in Compromise process.

If the IRS accepts your Offer in Compromise, you will only have to pay the offer amount instead of the entire tax liability. Keep in mind that a condition of any accepted offer in compromise is that you do not owe the IRS for the 5 tax years after the offer is accepted. If you end up owing the IRS again and cannot pay the balance, then the offer is considered defaulted and the entire liability reverts back to you.

 

These are the main options you have to resolve your IRS liability. You may also have appeals rights, rights to Collection Due Process hearing, audit reconsideration, or the right to file a petition with Tax Court to dispute IRS Collection actions, depending on your specific case.

If you wish to discuss your IRS issue, you can contact our office at 855.893.2308.