As much as we endeavor to be compliant citizens and file our taxes honestly and accurately, sometimes we make mistakes in our paperwork, and key information is misconstrued. Maybe you forgot to declare some freelance income because you didn’t receive a 1099 form, tried to write-off more business expenses than the IRS would accept, or simply made a mathematical error when calculating deductions.
Regardless of the error made, it’s highly unlikely that you will be receiving a surprise bonus refund check from Uncle Sam. The chances are that you have not accurately paid everything that's owed to the IRS, and once they realize that’s the case, then they want their money ASAP. And if your debt is not resolved immediately, it will begin to accumulate interest penalties at a rapid rate.
If you are in this precarious situation, you are not alone. According to Forbes magazine, in 2015, 45.3 percent of American households did not even pay federal income tax. The IRS takes their collections seriously, and with a number that high, they will do everything in their power to collect every cent owed to them, even going to the extreme of not allowing expiring passports to be renewed until the total tax debt is paid.
When you are faced with owing the IRS money, it’s a substantial financial inconvenience you probably didn’t plan for in your budget. You may feel like it is impossible to pay the amount the IRS is claiming you owe, and that there is no way out of your bleak situation. Since you cannot avoid the IRS forever, it’s crucial that you do everything in your power to resolve any tax issues that you face before they turn to extreme measures to collect your debt.
Often, the amount of debt we owe is more than we can handle paying all at once. The key is to be proactive so that you can avoid the IRS levying your bank accounts or property or garnishing your wages. Luckily, the IRS has programs set up that allow you to settle your debt for less than the amount that you owe. Tax settlement, or an Offer-in-Compromise, could be excellent options if you have a legitimate reason for not being able to pay your full tax liability, such as financial hardship. Here’s an overview of how it works.
What is a Tax Settlement?
A tax settlement, or Offer-in-Compromise, is an arrangement made between you and the IRS or state tax authorities that allows the taxpayer to pay less than what was originally owed. However, IRS authorities will only grant a tax settlement in extenuating instances. For a tax settlement to be considered, there must be a legitimate reason the taxpayer is unable to pay off the debt. Those who have found themselves paying taxes frequently say that IRS authorities are willing to explore individual situations to see if a settlement is an option.
There are a couple of benefits when it comes to a tax settlement. The most apparent benefit is paying a lower amount of total money to the IRS. If you meet the qualifications, it is also likely that the settlement amount will be determined within a short amount of time. Once you agree to and pay the amount, your account will be settled. This means you will no longer be subject to late fees and other penalties. Another benefit is that with settlement you can avoid having tax liens placed on your home, assets, or business. You will also avoid having a bank levy on your accounts or having your wages garnished.
Settlement: How it Works
To determine if you are eligible for a tax settlement, you must first apply and submit the appropriate forms for the IRS to review. You may opt to fill out and file the forms yourself, or you can choose to have a designated tax professional file them on your behalf. Before the IRS will consider your offer, you must first make sure you are current with all the filing and payment requirements. If you are not eligible for a tax settlement, the IRS will allow you to come to an agreement on another method that will allow them to collect your debt over time.
When determining your eligibility, the IRS looks at your ability to pay, your income, your expenses, and your asset equity. The IRS will generally approve an Offer-in-Compromise when the amount offered represents the most they can expect to collect within a reasonable period. Not everyone is eligible for a tax settlement, and only a small amount of people even qualify, but a good indicator of whether you will be eligible is an extreme financial hardship. However, the IRS may also determine that you don't have enough income to pay off a reasonable balance over time, and so your application will be rejected. In that case, the IRS may offer monthly payments of a certain amount per month until your balance is paid off entirely.
It is most common for the negotiation of your tax settlement to stay between you and the IRS or tax authority, but a third party may also be included if you seek assistance from a tax professional. When choosing to hire a professional to help you file an offer, check their credentials beforehand and make sure that the offer made to the IRS will be in your best interests. Hiring a tax professional from a firm that specializes in tax resolution will typically result in a positive outcome for you.
If your offer is accepted, it is likely that you will have to pay the entire settlement amount in a specified time frame. No late taxes or tax interests will be assessed on the balance of your settlement during this time. However, federal tax liens will not be released until your offer terms are satisfied.
While your offer is being evaluated, your non-refundable payments will be applied to the tax liability, which you can designate to a specific tax year and tax debt. All other collection activities will be suspended, and the legal assessment and collection period will be extended. Another thing to note is that your offer will be automatically accepted if the IRS does not make a determination on your offer within two years of the IRS receipt date. You can also file an appeal within 30 days if your offer is rejected.
Your initial payment will be based on what method of payment you choose. For a lump sum cash payment, you will submit an initial payment of 20% of the total offer amount with your application. If accepted, you will receive written confirmation, and the remaining balance must be paid in five payments or less. If you opt for a periodic payment, your initial payment will be submitted with your application. The rest of the balance will be paid in monthly installments while the IRS considers your offer. If accepted, your monthly payments will continue, with the last payment deadline coinciding with the final date attached to the tax settlement offer. Upon your last payment, your balance is considered paid in full.
Even if we try our best to be compliant when filing our taxes, it is still possible that mistakes will be made. If this has happened to you, and there has been no resolution, it is likely that you now have a debt to the IRS. Owing money to the IRS can be a huge headache, causing both financial and physical stress. However, this doesn't mean you should avoid it. It is vital to handle matters with the IRS as soon as possible so that they do not have to resort to more extreme measures to collect your debt. The sooner you act, the better. If you are cannot pay the full debt, applying for an Offer-in-Compromise or tax settlement may be the best option for you. This will allow you to settle your debt for less than the total amount owed.