Most citizens in the US comply with the tax authorities on a voluntary basis. They file their tax returns and pay whatever is due in order to keep the country strong and financially stable.
The most common reason for failing to keep to the tax rules is a lack of information. And in most cases the IRS will take steps to help the taxpayer comply with all the relevant rules.
But if can happen that you get into a position where you owe the IRS an amount of money that you can't pay. For example, your tax returns might have been incorrect for a number of years, meaning that you've paid less tax than is due. If that happens over a number of years, the outstanding amount can be substantial when penalties and interest are taken into account.
Well, the good news is that there are IRS debt relief options that can help people or businesses in your position.
IRS Debt Relief 1) IRS Tax Relief Settlement: This will allow a taxpayer to settle their debts for a percentage of the amount owed, depending upon their age, assets and personal budget.
IRS Debt Relief 2) Offer In Compromise: This scheme was developed by Congress to allow taxpayers a one time only chance to clear their debt to the IRS for a fraction of the actual amount due. The IRS will look at your case and will, according to certain guidelines, agree to settle your debt for a certain amount. However, as you would imagine, there are certain obstacles that must be overcome before your tax debt is reduced.
Tax legislation gives the IRS power to settle federal tax liabilities for less than the true amount when the taxpayer can show exceptional circumstances. For example, if they can show that tax collection would be unfair, inequitable or impose financial hardship.
The main problem with this scheme is that it's extremely popular. In fact so many unsuitable cases were submitted that the IRS, in an attempt to discourage OICs, started to investigate each case closely. However, since the early 1990s, due to a mounting backlog of uncollected taxes, the IRS has eased their requirements in order to settle more cases.
In fact, the OIC scheme is one of the most powerful IRS debt relief tools available to taxpayers. Millions of dollars have been saved by taxpayers who have used the Offer in Compromise scheme. However, before you think that this is the answer to all your problems, let me warn you that the IRS settles less than one percent of tax debts through the OIS scheme.
You can submit your own OIC application, but due to the complexity it's best to secure professional help. A tax attorney is invaluable for their experience in preparing applications and negotiating with the IRS. They may also be required for an appeal if your case is rejected.
Nine times out of ten, a tax professional is worth more than their fee, because the IRS will take advantage of someone who isn't entirely sure of the process.
There are three main categories that can be used to justify reducing an overdue tax account.
a) If there's doubt whether the tax is due
b) If there's doubt whether the full amount of tax will ever be paid
c) The tax assessment is correct, but due to certain circumstances (eg financial hardship) the taxpayer can't pay
If you go for the third option (financial hardship), your OIC application should be successful if you can show that the amount of tax owed is more than you could pay off in 5 years.
Once an application is made, the IRS looks at all the payment options open to the taxpayer in relation to the state of their personal finances and takes a decision; Would they rather have part of the tax debt or none of it? Their decision is largely based on their evaluation of whether the taxpayer will ever be in a position to pay the full amount.
The IRS then make an offer to the taxpayer - An amount that they think the taxpayer can reasonably be expected to pay in light of their financial situation.
IRS Debt Relief 3) Payment Plan: In some cases, the IRS will give taxpayers time to pay their tax debt when they are convinced that they can't settle their liability in one payment.
If you are unable to pay your tax liability, your account can be flagged “not currently collectible". This means that the IRS will not pursue collection until you are in a position to accept a payment plan or an Offer in Compromise is made.
IRS Debt Relief 4) Penalty Abatement: If you can't pay your outstanding tax debt due to certain circumstances that are out of your control, it's possible to challenge the interest and penalties that have been added to your account. This will help to reduce the size of your tax liability.
a) Statutory Exceptions - Tax code changes from minor to major
b) Hardship beyond the taxpayer's control - eg bad tax advice, fire, flood, natural disaster etc
c) IRS errors/mistakes
d) Reasonable cause - Death, serious illness, ignorance of the law etc
Again, due to the complexity of this scheme, it's advisable to appoint an experienced tax advisor. Applications for penalty abatement have to be extremely specific and comply with all the IRS rules and regulations.
by Stuart Laing
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