If you owe a tax debt to the IRS for back taxes and are searching for help for settling the taxes owed to the IRS, learning about the options you have available to get tax debt relief is important to determining which options work in your favor. Some of these options can result in a lower tax obligation and settlement amount, allowing you to resolve your tax issue without paying the entire tax amount due. Some of the ways to settle taxes owed are:
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Requesting a collection hold on your account if you have a financial hardship, medical challenges or incarceration
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Paying less than you owe, if you qualify for Offer in Compromise or Patrial pay Installment Agreement
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Setting up a full pay installment agreement
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Considering whether you qualify for an innocent spouse relief exception;
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Challenging the amount owed, if you know there was an error
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Filing bankruptcy
When a taxpayer fails to pay the amount of taxes due on time, then they may receive a letter from the IRS indicating the amount of back taxes owed, along with a deadline for paying any interest or penalties accrued on the amount of tax past due. Back taxes are tax liabilities that were the result of tax returns filed and unpaid, tax filing income and deductions that resulted in the underreporting, or incorrect reporting of the amount of taxes due. It can also result from the failure to file a tax return or from filing a tax return past the due date without first obtaining an extension from the IRS.
It is crucial to know the risks involved and the benefits of some ways to settle your tax debt compared to others, which may depend on the amount you owe, the length of time that has gone by, the initial tax filing submitted (or lack thereof), and the type of income and deductions that were claimed on the tax return. Let us first discuss the IRS statute of limitations on tax collection and limits on filing an amendment for purposes of reducing tax liability.
What is the Statute of Limitations for the IRS to Collect Back Taxes for Prior Tax Returns Filed?
In most circumstances, the IRS has a 10-year period from the filing of a tax return to collect back taxes owed. If it fails to do so, then it no longer can, and you can avoid a wage garnishment for those tax returns even if a tax debt would have been owed had the IRS proceeded in a more timely manner.
However, specific actions may extend the 10-year period. Some include if you have filed the following;
- An Offer In Compromise (OIC)
- Late tax returns
- Unfiled tax returns
- Fraudulent tax returns
- Installment Agreement processing times
- A petition for bankruptcy.
These will extend the period for when the IRS can collect back taxes for prior tax returns filed beyond the standard ten-year statute of limitations. It is vital to know your time limits.
Time limits for Filing an Amended Return
Since filing an amended return is another way to get help with settling past-due taxes, filing an amended or late tax return may be beneficial if it reduces your tax liability which will possibly reduce the amount of back taxes owed to the IRS. There is a three-year time limit to file an amended return. The IRS occasionally grants a more extended time limit under certain circumstances.
Back Tax Settlement Options
Offer in Compromise Settlement Agreement
For the Offer in Compromise “OIC” option, you must meet certain conditions beyond filing the form. The IRS offers a pre-qualifier tool on the following website to determine if you are a likely candidate for this option; https://irs.treasury.gov/oic_pre_qualifier/ and find out the potential settlement amount, if there is one.
Pre-Qualification Tool
If you are considering an OIC to settle your tax liability, you can use this tool as a starting point. First, enter your financial information as requested throughout the prompts. Using this pre-qualification tool and submitting the required financial information, a taxpayer can receive a preliminary eligibility decision and an estimated amount to reach a compromise for setting outstanding tax debt should they proceed with this Offer in Compromise (“OIC”) option. It is important to note that this is for informational purposes and is not a guarantee that this will be the amount that the IRS will agree to settle your outstanding tax debt.
Things to Consider with the OIC Option
While the OIC option may offer some taxpayers a way to pay off the tax debt due, and sometimes at a reduced amount, this is not always the case for everyone. As noted by the IRS, this tool is meant to act as a guide.
Something else to consider is that once an OIC has been approved; you must file your tax returns timely, and pay the tax due by April 15th of the following five years. Failure to do so will nullify the OIC and the full amount owed will become fully collectible.
Pay with Installment Agreement
The IRS will allow you to set up an installment agreement to settle your tax debt. Depending on the amount you owe, you can set up the agreement without providing any supporting documentation to the IRS. If the amount owed is substantial, and you are not able to make the minimum required monthly payment, the IRS will require a completed Form 433F-Collection Information Statement. If the statute of limitation on the collection time, usually 10 years, is running out, the IRS will typically settle the debt for a fraction of what you owe. This settlement option is called Partial Pay Installment Agreement (PPIA). The PPIA can also be used when you do not have sufficient disposable income or equity in assets to pay the tax liability in full.
Get penalties abated to reduce tax liability
Late tax filing and payment incurs hefty penalties and Interest as discussed in this article. Fortunately, the IRS does have programs for reducing or abating tax penalties. One such program is the first-time penalty abatement, which can be requested without any supporting documentation. You simply have to ask for it, and if you qualify, the penalty will be abated.
Other penalty abatements are providing a reasonable cause and documentation to support your request. The reasonable causes can be a death or illness in the family, casualty, natural disaster, fire, missing records, a mistake was made unknowingly, bad advice or reliance on bad advice.
Each individual’s situation is very different and must be reviewed to determine if it meets reasonable cause standards. Seeking a tax professionals’ advice is key to successfully reducing your tax penalties.
Request a Currently Not Collectible (CNC) hold
The IRS allows taxpayers to request collection holds on their accounts in certain situations such as:
- Having financial hardship and not being able to meet your basic living expenses
- Serious health challenges that impact your ability to maintain a job or earn a living
- Incarceration
- Excessive medical bills
The CNC Status is very effective because although it stops the enforcement of collection by the IRS, it does not stop the statute of collection from running.
Other Options to Consider
Pay Your Taxes on Time
Paying on time makes it easier to avoid this situation from occurring. It can also help you avoid the interest and penalties that accrue when taxes are late and overdue. If you need help filing your return by the due date, then you can request an extension or seek out advice from nearby tax professionals, many of whom will offer free consultations.
Pay Tax Debt Owed On IRS website
If you want to pay with your bank account, you can use the IRS Direct Pay available on the IRS website. If you would like to pay with a credit card, the IRS now has approved third party payment processors listed on their website with low processing fees. https://www.irs.gov/payments/pay-taxes-by-credit-or-debit-card