What is Tax Debt?
Tax debt is monies owed to the IRS originating from any current or past tax returns. Tax debt may include income tax owed combined with any accumulated interest and penalties. Neglecting to pay your taxes can result in even greater debt + wage garnishments, levies, and long-term damage to your credit report.
There are many reasons why individuals may find themselves with a large amount of tax debt. The inability to pay taxes may be the result of a layoff or extended periods of unemployment, illness, divorce, an accident, or the mismanagement of funds. Fortunately, no matter what the reason may be for your tax debt, tax debt relief is available through a number of sources and other solutions.
Short-term solutions for tax debt relief include borrowing from a family member or a friend, selling any valuables for cash (or liquidating), taking out a short-term personal loan, or applying for an Offer in Compromise (OIC) through the IRS. A long-term solution for tax-debt relief is an IRS installment agreement, and a permanent solution is tax bankruptcy.
An Offer in Compromise can provide tax debt relief for taxpayers who cannot pay their tax debt in full or if an installment agreement is not an option. An OIC is an agreement between the IRS and a taxpayer that resolves the taxpayer’s debt. The fee for filing is $150 but in some cases, the fee may be waived. With an OIC, the IRS can choose to settle the taxpayer’s debt by accepting less than the full payment if there is (1) doubt as to liability, (2) doubt as to collectibility, (3) if the collection of the tax would create an economic hardship or (4) if it would be unfair and inequitable. In order to apply for an OIC, taxpayers should fill out Form 656 (and possibly 656-L), available at www.irs.gov. If you need assistance, please contact an IRS collection representative at 1-800-829-1040 or consider consulting with a tax attorney or a certified public accountant (CPA).
There are several things to keep in mind when applying for an Offer in Compromise or when seeking assistance with the process. Obtaining approval for an Offer in Compromise is difficult, so if possible, think of a Plan B or revisit the list of short-term and long-term solutions to be absolutely sure you have exhausted all possibilities. When seeking assistance with applying for an OIC, it’s best to avoid services that use the following language “settle your tax debts for pennies on the dollar” through the Offer in Compromise Program. Instead, read Publication 594 (The IRS Collection Process) and stick with trusted names in the industry. Publication 594 is available at www.irs.gov or by calling 1-800-829-3676.
An IRS Installment Agreement, also called payment option, payment plan, and payment agreement is an agreement between the IRS and the taxpayer to make payments on taxes owed. You will be charged a fee to start the installment agreement as well as interest and penalties. Interest and penalties may be minimized of you are able to resolve your tax debt immediately or in a few of months. Taxpayers with $25,000 or less in combined tax, penalties, and interest are eligible to use the Internal Revenue Services’ Online Payment Agreement (OPA), available at www.irs.gov. If assistance is needed, please contact an IRS collection representative by calling 1-800-829-1040 or contact a tax attorney or a CPA.
If Tax Bankruptcy is your only option, you must contact a tax attorney to assist you with this complicated process. In general, if taxes are old enough they are dischargeable in Chapter 7-provided certain criteria are met.