If you had a surprise on your taxes or just didn’t have the money to pay your tax bill, and now you owe back taxes along with interest and penalties, you may qualify for a negotiated arrangement through the Internal Revenue Service that can help you get back on track.
What Options Are Available to Settle My Tax Liability?
In 2011, the Federal Government introduced the Fresh Start Program. Through it, the IRS offers debt relief to taxpayers who may otherwise be unable to settle their delinquent tax liabilities without help. The program establishes several pathways for taxpayers with outstanding tax liabilities to negotiate agreements with the IRS.
The IRS may allow them to set up a repayment plan that includes installment agreements. Someone who is struggling to figure out how to make payments on what they owe might even be able to negotiate their total tax liability so that the taxpayer pays pennies on the dollar to settle their IRS debt.
The program also includes protections to prevent exorbitant fees and penalties that can prevent taxpayers from being able to meet their basic needs and monthly expenses.
Settle Your Tax Debt Online
If you are able to pay your tax debts in one lump sum, you can do it through the IRS website with no extra fees, penalties, or interest. If you’re not able to make full payment, you may be able to set up an installment plan online.
Short-Term Individual Payment Plan
If you owe less than $100,000 total tax debt, including penalties and interest, you may qualify to apply online for a short-term payment agreement.
There is no setup fee, but penalties and interest will continue to accrue until your IRS tax debt is paid in full. The short-term installments must have your tax debt settled in 180 days or less.
Long-Term Individual Payment Plan
If you have filed all your tax returns and owe $50,000 or less in total tax debt, including interest and penalties, you may qualify to apply online for a long-term payment plan.
The long-term option has a $31 origination fee, unless you qualify under the low-income guidelines, where your adjusted gross income for your most recent tax return was at or below 250% of the federal poverty level, in which case that fee may be waived. Penalties and fees will continue to accrue until your tax debts are settled.
If your balance is more than $25,000, you will be required to set up a Direct Debit Installment Agreement to allow your payments to be automatically deducted from your bank account.
If you’re unable to settle your tax liability within 180 days, you may be still able to negotiate an installment agreement with the IRS if your tax debt is less than $25,000, or up to $50,000 if you agree to set up automatic direct debit or payroll deduction.
An installment agreement will forestall the IRS from pursuing a bank levy or tax lien on your assets as long as you continue to satisfy the terms of the agreement and make your monthly payments. You will need to have filed, and continue to file, timely tax returns under the terms of the agreement. This option allows you up to 72 months to settle your tax debt.
If you don’t qualify under this framework, there still may be options for you to make monthly payments, but it may require that you go through the tax lien determination process where the IRS assesses your assets prior to setting up a payment agreement.
In some cases, when you owe money to the IRS and can’t pay the amount you owe within a reasonable timeframe, the IRS may be willing to negotiate your tax debt to a more manageable total amount. Under IRS guidelines, they will consider your ability to pay, your income and expenses, and your assets when making a decision on whether to reduce your income tax debt.
The IRS generally considers reducing tax debts in situations where there is some doubt about the accuracy of the tax liability, as in cases of dispute over the amount of taxes owed. They may also consider a reduction when there is doubt over the taxpayer’s ability to pay the full amount because of financial hardship.
Before the IRS considers an Offer in Compromise, you must explore all other available options.
To be eligible for a reduced IRS tax debt under the Offer in Compromise program, you must have filed all required tax returns and made all required estimated payments. You cannot have an open bankruptcy case. If your current year of taxes is delinquent, you must have a valid extension in place. If you employ people, you must have made tax deposits for the current quarter and past two quarters.
If you apply for an Offer in Compromise and are determined not to be eligible, the IRS will return your application and the application fee. Any other payment you offered with the application will go toward the balance of your IRS tax debts.
There is a $205 application fee unless you meet the Low-Income Certification guidelines, when it is waived.
You must choose either the Lump Sum Cash option or the Periodic Payment option when you submit your offer to the IRS.
Lump Sum Cash offers must include 20% of the total offer paid when you submit the offer, and the remaining balance must be paid in five or fewer payments within five months of the date the offer is accepted.
Periodic Payment offers require the first payment to be included with the offer, and then the remaining balance will be paid in monthly payments for 6 to 24 months, as proposed in your offer. While the IRS considers your offer, you must make the payments as you proposed in your offer. Failure to make your payments will result in the IRS returning your offer, and you cannot appeal the decision.
If you meet the Low Income Certification guidelines, you don’t have to send the initial payment or the application fee. Nor do you need to make your monthly payments while the offer is under review.
While your offer is being considered by the IRS, you don’t need to make payments on any installment agreements that you have previously negotiated with them. You do, however, need to make all payments according to the offer you submitted.
If the IRS has initiated collections proceedings on your tax debt, those are generally suspended while your offer is evaluated and, if your offer is rejected, for 30 days following the rejection. If you appeal, collections are suspended while the IRS considers your appeal.
If a tax refund is owed to you while you have an outstanding tax debt with the IRS, they will keep your refund (with interest) and apply it toward your tax debt.
Temporarily Delayed Collection
If you cannot make payments toward your tax debts because it will mean you can’t cover your basic living expenses, the IRS may give you some time to get in a better financial situation before you are required to pay.
To request that the IRS consider temporarily delaying your payments, you must file a Collection Information Statement along with supporting documents that establish your current financial hardship. If the IRS agrees that you can’t afford to pay now, your account will be reported as uncollectible until your situation improves.
While your payments are delayed due to your financial difficulties, interest and penalties will continue to accrue, so your IRS tax debt will keep growing.
The IRS will continue to review your financial status until you are able to resume payments.
When Should I Consider Getting Help From a Tax Professional?
If you are past due on your taxes or have an outstanding tax liability that you cannot pay, it can be immensely helpful to have tax professionals on your side to help you navigate the negotiation process.
Avoid Costly Mistakes
While you can navigate these IRS debt negotiations on your own, be aware that there are a lot of important details and nuances. If you misunderstand something or miss a piece, your proposal is very likely to be rejected by the IRS.
In many situations, these rejections may not be appealed. Therefore, your best bet is to hire a tax professional to help you figure out what your best option is to get your tax debts settled as quickly as possible and for the least money.
Tax professionals understand the IRS’s complex debt relief system and know which programs you might best qualify for, which will save you both time and money. By targeting the option that best suits your situation, you lessen the risk of wasted application fees and rejections that leave you vulnerable to actions by IRS collections as they try to recover your back taxes however they can.
Once you have a successful proposal under review by the IRS, they largely stop pursuing your IRS debt until your proposal has been accepted or rejected. It’s worth your time and effort to seek relief as soon as possible, with or without professional help.
Early Resolution is Best
If you contact a Seattle tax attorney as soon as you get a bill from the IRS that you know you can’t pay, you have the best chance of avoiding serious penalties. If you ignore your tax debt, the IRS will move quickly to initiate collections, potentially including a bank levy, liens against your assets, or wage garnishments. A good tax expert can help you take steps to avoid these things and negotiate an agreement with the IRS to get your debt resolved that will work for you.
Get Support Throughout the Process
There are processes that the IRS should pause while they consider your proposed installment agreement or Offer in Compromise. They should pause levies on your bank accounts but may continue liens on assets. They should pause other installment payments while offers or appeals are in process. If they do not follow guidelines and stop inappropriate collection activities, your Seattle tax attorney can help you get the IRS to leave you alone while you wait.
Figuring out what to do when you have outstanding back taxes that you don’t know how to pay can be difficult. Having a professional there to help you navigate the system can make the difference between suffering through wage garnishments and liens on your assets while you pay more than you can afford, or getting some debt relief in the form of manageable payments, a reduced IRS debt, or even some extra time to get to a better financial situation where you can manage the payments.
If you’re frustrated and confused about your IRS debts, our team of experienced and compassionate Seattle tax attorneys can help you find a solution that works for you. Call Seattle Legal Services, PLLC at 206-895-7268 to discuss your situation today.