"In this world nothing is certain but death and taxes"
People with tax debt have a variety of options based on their specific situation
Benjamin Franklin made this statement over 200 years ago and it is just as relevant today. For many people with tax debt, facing the aggressive debt collection tactics of the IRS is something that makes them feel as helpless as facing the Grim Reaper itself.
Fortunately, the IRS is the more forgiving of the two and there are ways to overcome tax debt. From arranging a more manageable payment plan to discharging tax debts altogether, people with tax debt have a variety of options based on their specific situation.
The first option for taking care of tax debt is an installment agreement. When dealing with the IRS, an installment agreement is essentially a monthly payment plan for paying off your tax debts. Setting up an installment agreement is a relatively easy option and is well suited for people who have less than $10,000 in total tax debt.
All you need to do in order to set up an installment agreement is fill out Form 9465 or visit the Online Payment Agreement Application
page on the IRS site. When setting up an installment agreement, you decide how much money you will pay each month to the IRS and on what day you will make your payments. As long as your payment plan will pay off your entire tax debt (including penalties and interest) within 3 years and you have less than $10,000 in total tax debt, the IRS is required to accept your installment agreement.
Partial Payment Installment Agreement
Another option that is similar to the installment agreement is the partial payment installment agreement. The difference between the two is that with the partial payment installment agreement, you make your regular agreed upon monthly payments for a set period of time but these payments do not pay off the entire tax debt. After the agreement period, the remaining tax debt is forgiven.
Because the partial payment installment agreement gives you the ability to settle your tax debts, applying for this agreement is much more difficult. The formula for determining your monthly payment amount involves calculating your outstanding tax debt balance, the remaining statute of limitation on collecting the debt, and the reasonable collection potential. As such, it is suggested that you consult with an experienced tax professional to help you determine if a partial payment installment agreement is the best option for you and to help you negotiate for the best monthly payment amount.
Offer in Compromise
An Offer in Compromise, is a second way to settle tax debts. With an Offer in Compromise, you agree to a lump sum or short term payment plan to pay off a portion of your total tax debt in exchange for the IRS forgiving the remainder of the debt.
Successfully negotiating an Offer in Compromise requires that you prove you are unable to pay off the entire debt or that there is doubt as to whether or not you owe the entire debt. Proving either of these conditions to the IRS requires that you accurately complete a number of forms and supply complete backup documentation. In many cases, it is advised that you get the help of a tax professional to manage this process.
Once you have successfully negotiated an Offer in Compromise, there are a number of requirements you must fulfill or the Offer can be revoked. After your Offer in Compromise has been approved, you are required to file your taxes on-time for the next five years and pay any taxes you owe by the April 15th deadline. Not doing either provides the IRS with grounds to revoke the agreement in which case they will reinstate the full amount of you tax liability including additional penalties and interest.
Tax Debt Discharge
By taking advantage of the 10-year statute of limitations on tax debt collection, it may be possible for some people to discharge some of their tax debt. A tax specialist can help you determine whether or not this is an option for you and help you avoid doing anything that could extend the statute of limitations.
One way that people use the statute is to request "currently not collectible" status. When doing so, a taxpayer is claiming to the IRS that they have no ability to pay their tax debts. This typically requires the taxpayer demonstrate an unmanageable tax burden and significant financial hardships. If these can be proven, the IRS must stop all collection activities including levies and garnishments. Then, if the taxpayer maintains their currently not collectible status as their tax debts expire because of the 10-year statute of limitations, they may no longer be required to make these payments to the IRS regardless of their financial situation.
Discharge Tax Debt through Bankruptcy
Filing for bankruptcy
may be another alternative for discharging your tax debts; however, a bankruptcy is generally considered to be a last resort. In addition, there are numerous requirements determining which tax debts can be discharged including how old the debts are and the filing status of the taxpayer.
Before declaring bankruptcy, consult with a tax professional to determine how a bankruptcy will affect your tax debts and to take steps to maximize the benefits.