Yes, the IRS provides many different types of tax relief options for taxpayers in debt. Before deciding on anything, ask yourself the following questions:
If you are having trouble answering one or more of these questions, then consulting a reputable tax attorney is helpful to guide you through this process. Even if you feel like you have a good idea about which option is most compatible to your situation, you should still speak with a tax attorney.
Be certain you are choosing the correct relief program; this will save you a lot of time, money, and headache in the long run. Here are some of the most common options available for you:
An Offer in Compromise (OIC) is an IRS program that allows you – the taxpayer – to settle your liabilities for less than the full amount owed. The IRS will generally accept an OIC when it is unlikely that the tax liability can be collected in full over the collection statute period (generally 120 months from the date of assessment), and the offer amount made is at least equal to the amount calculated to be collectible by the IRS.
Here is how an OIC generally works:
A tax debt can be legally compromised for one of the following reasons:
The IRS has strict guidelines to decide who qualifies for an Offer in Compromise. Using a set of calculations based on your income, assets, and allowable living expenses, the IRS will determine if it is financially possible for you to pay off your tax debt. If it shows that you won’t be able to pay the full amount, there’s generally a very good chance that you’re eligible for an OIC settlement for an amount less than what you currently owe.
Deciding on whether you qualify for an OIC can be a tricky task; preparing and negotiating an OIC settlement is much more difficult. It is a very complicated procedure that can take anywhere from six months to a year. Making a successful Offer in Compromise requires significant skill and full compliance with IRS regulations procedures and guidelines. One simple mistake or omission may result in the rejection of your offer. In certain cases, the IRS will allow more than national or local standards for allowable expenses for the calculation of monthly disposable income, an experienced practitioner can decipher if the IRS will waiver from the standards.
Also many assets can be discounted for various reasons, discounts that are often missed by lay persons. Therefore experience, skill, and judgment can make the difference between the approval or rejection of your offer.
When considering an OIC, you should at the very least consult with a reputable tax attorney, preferably one who is a former IRS attorney. Make sure that IRS tax controversy and IRS collection resolutions are the backbone of his/her practice. Hiring an experienced tax attorney will benefit you in three major ways: (1) you’ll know whether or not you should submit an OIC, (2) you’ll negotiate the most favorable possible compromise, and (3) you’ll significantly increase the chances of your offer getting approved by the IRS. Also an attorney provides attorney client privilege in cases where an enrolled agent or CPA cannot.
A different strategy for tackling your IRS tax debt is by applying for an Installment Agreement. An IRS installment agreement will allow you to pay off your debt on a monthly basis. There are different types of installment agreements offered by the IRS. Knowing which one you qualify for is important, and a tax attorney can guide you through this process.
The threshold for qualifying for an installment agreement without having to provide your full financial information is $50k in owed back taxes. If you owe less than $50k, then you can either qualify for a “guaranteed installment agreement” (if under $10k), or you can qualify for a “streamlined installment agreement” (if under $50k). So, if you are under the threshold, are in current compliance, and meet other specific requirements, then you should be able to qualify for either of these options with relative ease. This program can help you get on an installment agreement without the Service having to file a Notice of Federal Tax Lien, which could preserve your credit.
However, if you owe more than $50k in taxes and/or cannot pay the amount owed in six years or less, then you will have to submit your financial statement (includes income, assets, living expenses, bank accounts, etc.). A special type of installment agreement that doesn’t get much attention is the Partial Payment Installment Agreement. It is, in a way, a merger between an Offer in Compromise and an Installment Agreement; that is, the IRS will agree to accept less than the full amount owed through a monthly payment plan (instead of a lump sum in OIC).
In other words, you pay what you can afford on a monthly basis until the 10-year statute of limitation expires, and the remaining balance disappears. Let’s say you determine that the IRS has three years left to collect your tax debt. Your total debt amount is $30,000. With the help of a tax attorney, you calculate that you can only afford to pay the IRS $300/month over the remaining timeframe. Therefore, you will end up settling your debt for the amount of $10,800. In practice, generally Taxpayers request an Offer In Compromise instead of a Partial Payment Installment Agreement because of the finality of an Offer, however a Partial Payment Installment Agreement might be advantageous if a Taxpayer cannot wait for an offer to be considered; processing of a Partial Payment Installment Agreement is much faster.
Moreover, there is leniency for equity in assets in certain circumstances. One example is when the primary residence of the Taxpayer has equity but Taxpayer cannot find suitable replacement housing if the property were to be seized. In such a case, the IRS may allow the partial payment installment agreement even though there is equity in assets. Partial Payment Installment Agreements may also make sense for in business payroll liabilities even if the business has equity in assets.
Just as in an Offer in Compromise, it would be very wise to consult a seasoned tax attorney who will expertly analyze your unique financial situation and negotiate the most favorable outcome.
Through a Penalty Abatement, you will only be able to get rid of amounts owed due to certain penalties. The original tax debt owed and interest accumulated will not be affected. The most common ways are through the First-Time Penalty Abatement (FTA) and/or Reasonable Cause Penalty Relief. To read more about Penalty Relief options, click here.
There will come a time when an average Joe will have to go head to head with the IRS. Going into negotiation with a government agency that holds more power than you do can be a daunting prospect to say the least. Nevertheless, the method in which you approach the negotiation can dramatically affect your chances of success.
Whether you are clarifying a misunderstanding, setting up an installment agreement, submitting an offer in compromise, dealing with an auditor, or worse yet, answering a knock on your front door by an IRS agent, you will need some basic negotiation skills.
Tips to negotiate back taxes:
DO NOT LIE to the IRS. It is in your best interest to always, always tell the truth when dealing with the IRS. Lies rarely go unchecked, especially with an agency whose job revolves around finding inconsistencies in your records. Once you are caught in a lie, you will lose credibility with the IRS and they may even look at you as a suspect. Bear in mind, some lies may land you in jail, especially if they are on forms and signed under penalties of perjury.
Don’t talk too much. Disclosing too much information might come back to bite you. When speaking to an IRS agent, be succinct and straight to the point. Some agents might try to put you under pressure in order to squeeze more information out of you than you are obligated to give. Do not get intimidated, and be firm and concise with your answers.
Be informed about crucial deadlines. Some collection notices carry crucial deadlines which can stop collection action before it happens. If certain deadlines are missed, you could lose your ticket to the United States Tax Court. Without an objective party between you and certain collection action, you may be at the mercy of the IRS if certain deadlines are missed.
Be aware of collection statutes of limitations. When you request Collection Due Process Hearings, request Offer In Compromises, initiate litigation in court, file for bankruptcies, or a slew of other actions, you may be stopping the collection expiration statue which might be against your own interest in certain cases. Be conscious of what you are doing and how it could affect your case.
Leave your bad attitude and anger behind. You will achieve nothing by yelling at the IRS agent assigned to your case. The IRS as an agency is filled with bureaucracy, and they may not be as efficient as you want them to be. Some days you wait hours on the phone just to get a hold of an agent, and as soon as you say hello, the line cuts off. This can be very frustrating. Nevertheless, when dealing with the IRS, avoid any confrontation. Take a deep breath, show respect, and demonstrate a cooperative attitude. Remember, IRS agents are just doing their jobs.
Only make promises you can keep. Sometimes the IRS’s analysis of your financial situation will indicate you can pay a certain amount per month to resolve a tax debt settlement. If an IRS agent asks you if you can pay $600 per month, and you realize that you can only pay $450 per month, then tell the agent that’s all you can pay. Don’t set yourself up for failure by agreeing to pay something you can’t afford. Defaulted agreements may put you at a disadvantage in future negotiations.
Go to them before they come at you. Generally, it is better for a taxpayer to come into compliance with the IRS than for the IRS forcing you into compliance. This shows cooperation and a willingness to resolve a tax debt, which the IRS will appreciate by giving you more options and leniency in your case. For example, if you can’t make a payment, call the IRS and let them know in advance. Explain your situation. They will likely grant you the extension you need.
Use IRS terminology. This will show an IRS agent that you know what you are talking about. Using IRS terminology will grant you more respect during a conversation. For example, if you are negotiating an Offer in Compromise, know the difference between RCP (reasonable collection potential), disposable income, and monthly income and use them correctly during the negotiation.
Know when to stop the interview and get help. You thought you could do this all by yourself, but now things are getting tricky, you are overwhelmed, and you are definitely out of your depth. That’s ok, take a deep breath, stop the conversation, and simply inform the agent that you will be seeking representation.