Have you received a notice from the IRS regarding a tax debt? If so, you may be wondering what your next steps should be. One of the best ways to resolve your tax debt is through an IRS tax settlement. Let’s take a closer look at what tax settlements are, the different types of IRS tax settlements available, and how to go about finding the right one for your needs.
What is an IRS Tax Settlement?
An IRS tax settlement is a resolution between you and the Internal Revenue Service (IRS) that allows you to pay less than what you owe in taxes. Depending on your circumstances, there are several different types of settlements available. The qualifications for each type of settlement vary. Additionally, not every taxpayer will qualify for each type of settlement. The specific requirements depend on the type of settlement being applied for as well as other factors such as income level and assets owned by the taxpayer.
Types of Tax Settlements
Offer in Compromise: An Offer in Compromise (OIC) allows you to settle your entire balance with the IRS for less than what you owe. This type of IRS tax settlement can be beneficial if you have serious financial difficulties or if it would be impossible for you to repay all your taxes in full. To qualify for an OIC, however, you must provide extensive financial information about yourself which shows your inability to pay. Generally, if you qualify, the amount you pay will be equal to a percentage of the value of your assets, plus one or two years of future income, depending on the type of offer selected.
Partial Pay Installment Agreement: A Partial Pay Installment Agreement (PPIA) is used when you can demonstrate to the IRS that you cannot fully pay your tax debt within the remaining collection statute but can make some payments and is often used if you can’t qualify for an offer in compromise. The IRS will require you to make monthly payments until the end of the collection statute expires, at which time the remainder of your tax debt is written off. You can expect the IRS to ask you for updated financial information at least every two years while the collection period remains open to see if your ability to pay has improved.
Currently Non-Collectible Status: When you don’t have the ability to make even small payments toward your back tax debt without creating a financial hardship, the IRS can place you in Currently Non-Collectible Status. The IRS will temporarily stop collection activity against you for your unpaid taxes due to your inability to pay. Under this type of settlement, no payment is required until the your financial situation improves. Typically, the IRS will review your situation annually by looking at the income reported on your tax return. While you’re in CNC status, interest and penalties will accrue. However, similar to a PPIA, it’s possible for the collection statute to expire and the tax debt wiped clean before you make any payments.
Innocent Spouse Relief: When a married couple files a joint tax return, both spouses are liable for all taxes due on the return or later determined to be due as a result of an IRS audit. Sometimes, it would be unfair to hold both spouses liable when one spouse did something wrong on the return and the other spouse did not know or have reason to know of the issue that created the tax liability. Luckily, there are several grounds upon which you may apply for and obtain innocent spouse relief. If you are granted innocent spouse status, you may be relieved of all or a portion of the joint tax debt.
Penalty Abatement: There are times when due to special circumstance you’re late in filing your return or paying your taxes and the IRS assesses penalties and interest. The IRS realizes that in spite of a taxpayer’s best intentions, things happen that prevent them from complying with their tax obligations on a timely basis. The IRS will abate penalties and interest on the penalties if you have “reasonable cause” for missing a deadline. Among other things, reasonable cause can include events such as an illness, death, inability to obtain records, fire, and casualty. In addition, the IRS has a first time penalty abatement (FTA) program by which they will abate penalties if you have a clean compliance record for the three years prior to the year at issue. The FTA requires you to be current with your tax return filings and have paid or arranged to have paid any taxes due.
Finding a Solution to Your Tax Debt
Finding the right solution for resolving your tax debt can feel overwhelming—but it doesn’t have to be! Knowing what kind of tax settlements are available, how you qualify for them, and their many advantages can help you make informed decisions about your personal finances and ensure that your rights as a taxpayer are protected. Working with IRS tax settlement professionals such as those at East Coast Tax Consulting Group that specialize in negotiating with the IRS can be extremely helpful in saying goodbye to your tax problems.