When it comes to settling IRS back taxes
there are many options. It is best that you learn all available options
and see what fits your individual situation the best before setting up a
plan of attack. Some important factors to figure out prior to making
your decision of what back tax settlement method to use are your tax
amount owed, amount you can afford to pay, the amount of assets (equity)
you have, and if you would be able to pay amount in full if you just had
more time. Below are the 5 most common methods to settling back taxes.
Offer in Compromise
An offer in compromise is the method that allows individuals to settle
IRS back taxes for less than the total amount originally owed. Whenever
you hear the saying, "Settle for Pennies on the Dollar", this is the
method that is used. It shouldn't come to a surprise that this is the
hardest settlement to reach with the IRS. The IRS has strict
requirements to qualify for an offer in compromise. The purpose of an
offer in compromise is to find a compromised amount that works for the
tax payer and the IRS. What this means is that the IRS will settle your
amount for less money if you can show that it is not worth the time of
the IRS to try to collect from you because it will cost them more to try
to collect than the amount that they would eventually end up collecting.
An offer in compromise would be a good method of settlement if your
total equity you have in assets is worth less than the tax amount owed.
Installment Agreement
An installment agreement is the most common method for individuals to
settle their back taxes. With an installment agreement you will be
required to pay monthly payments towards the tax amount owed in a period
of less than 3 years. With an installment agreement you will still have
to pay interest on the amounts owed plus and any penalties you may have
received, so in the end up paying more than the original tax amount
owed. An installment agreement should be used if payments cannot be made
in full but you do have the ability to pay them off over time in smaller
monthly payments.
Delay the IRS
If you just need more time to pay the total amount due this can easily
by done by using your understanding of the IRS system to your advantage.
When the IRS realizes that you owe back taxes, they will begin their
sending their automated notices. There are a series of letters that the
IRS sends before it actually takes actions against individuals to
collect. Typically the IRS sends an original assessment letter stating
the amount of tax owed plus any interest and penalties then it will send
a series of four CP Letters (CP1-4, as noted in upper right of letter).
Typically once you start receiving these letters you have 4 to 6 months
before the IRS takes collection action if nothing is done on your part.
To delay the IRS and buy yourself more time all you have to do is write
a letter back to the IRS in response to the assessment notice or CP
notices and state that you cannot pay at the current time and ask for a
45 day extension. If you still cannot pay by this time you can simply
repeat the process to buy more time. Just know that once you receive IRS
notice CP-504, you will not have much more time until they take
collection actions against you.
Currently Not Collectible
This method doesn't really settle your back taxes, but it puts a hold on
collections. When you receive currently not collectible status, the IRS
will temporarily stop collection activities against you and they will
require that you submit an updated financial statement every year to see
if your situation has improved enough for them to go after you and
collect. One thing to keep in mind here is that the statute of
limitations is still running and the IRS has 10 years to collect back
taxes from the year they were filed. If 10 years passes and they have
not collected, you no longer owe that amount.
Tax Professional
Tax professionals are many times the most efficient way to get the best
settlement with the IRS. Tax professionals have the highest success rate
for getting offer in compromises settled and for the least amount of
money, have the best methods for setting up installment agreements that
work best for individuals that cannot pay, or finding other methods that
would better suit the individuals for their particular situation. Most
tax professionals will offer a free consultation to give you your
options, likely outcomes, and cost. It is best to talk to multiple tax
professionals to find the one that you feel gives the best suggestions,
you get along with best, and gives you a reasonable price.
Every year thousands of people settle
their unpaid back taxes with the IRS. Tax laws only continue to get more
complex and this causes more people have problems with back taxes.
Understanding your options and taking action early is always the best to
prevent more future penalties and interest.
