IRS Tax Debt Settlement: Payment Plans and Offers in Compromise
When a taxpayer receives money back from the IRS, it can be a really exciting day. Many see this extra money as an opportunity to do a home project, or put toward a vacation, or buy something they really want or need. The flip side, as we all know, is that many taxpayers end up owing money to the IRS, and they don’t always have the funds to pay their debt. This article discusses the different options for tax debt settlement.
If you can pay your taxes on time, it is advantageous to do so. Here’s why:
Paying on time avoids additional interest and penalties.
Paying on time prevents offsetting future refunds.
Paying on time thwarts potential issues obtaining loans.
If you will be able to pay your taxes in full given an extended amount of time, you have the option to set up a Payment Plan.
A partial payment installation agreement allows taxpayers to sign up for a long-term plan to pay off a reduced amount of tax debt with the lowest possible monthly amount.
A short-term payment plan is for taxpayers, sole proprietors or independent contractors who owe $100,000 or less in combined tax, penalties and interest.
A long-term payment plan is an installation agreement for taxpayers who owe $50,000 or less in combined tax, penalties and interest, and filed all required returns. Businesses can have a long-term payment plan if they filed all required returns and owe $25,000 or less in combined tax, penalties and interest.
Interest and penalty charges will continue to be added until the balance is paid in full. Additionally, unless you qualify for Low Income Taxpayer Status, you will have to pay a setup fee. Click here for additional information from the IRS about Payment Plans.
If you don’t have the funds or if paying them in full will create financial hardship, an Offer in Compromise (OIC) is a way for taxpayers to settle their debt for less than the full amount owed. When determining if an OIC will be accepted, the IRS will consider personal information including the ability to pay, income, expenses and asset equity.
If you can afford to pay your taxes, the IRS cannot accept an OIC. If you are involved in open bankruptcy proceedings, you are ineligible for an OIC.
The application fee for an OIC is $205, unless you qualify for the low-income certification or submit a Doubt as to Liability offer.
Before submitting an OIC, taxpayers must file all required tax returns. It is also recommended that taxpayers use the Offer in Compromise Pre-Qualifier tool to help determine if they meet the requirements. The tool provides an estimate of an acceptable offer amount. The Pre-Qualifier does not mean that an OIC will be accepted; the IRS makes the final determination.
An OIC is typically approved when the amount offered is the most the IRS can expect to collect and all other payment options have been explored.
Submitting an OIC is a detailed process that requires a lot of forms. Form 656 Booklet provides all forms and step-by-step instructions needed to submit an OIC. Taxpayers who do not meet the Low-Income Certification guidelines are required to submit an initial payment when the OIC is filed. There are two options:
Lump Sum Cash is when an initial payment of 20% of the OIC is submitted, and the remaining balance is paid in five or less payments.
Monthly Payments is when the amount of the offered monthly payment is paid, and payments continue monthly until the debt is paid in full.
If an OIC is accepted and installments are not paid on time, the taxpayer will be in default, and will have to pay the remaining balance owed in full. If an OIC is rejected, it may be appealed within 30 days using Form 13711.
Contact us!
While it should always be a goal to pay your tax debt to save money and avoid other repercussions, I can help you determine if another option is in your best interest. Please contact me to discuss tax debt settlement or any other tax issue.