We understand how stressful it can be if you haven’t filed one or more tax returns, or if you’ve accumulated an unmanageable tax obligation. While you may be tempted to disregard the issue, you should be aware that the IRS will not abandon its efforts to collect the amount.
The good news is that you can still get out of the hole in a way that permits you to live a regular life rather than ending up in the poorhouse. We’ll go through five techniques for settling an overdue tax debt and resolving your tax issues in this article.
Tip 1: Use the “Currently Not Collectible” status to get some temporary relief.
When it comes to collections, the IRS can be harsh. They have the power to seize your bank account, garnish your earnings, and place a tax lien on your home.
If you’re in a scenario where you can’t pay your tax payment, you can ask the IRS to put your debt on the Currently Not Collectible (CNC) list, which puts a stop to any collection efforts.
Of course, you’ll have to show that you’re now unable to pay. You’ll still be charged penalties and interest, but you’ll have some breathing room while you straighten out your finances and improve your circumstances.
Tip 2: Don’t take a “Substitute Return” for granted.
If the IRS discovers that you haven’t filed your taxes, they will file a substitute return. The IRS’s “best estimate” about your income and how much you owe is on this type of return. Because these returns do not take into account your deductions, they are invariably a worst-case scenario that overestimates your tax liability.
Rather than agreeing to pay the amount the IRS claims you owe based on the substitute return, you should file your own tax return for the year (or years) for which the IRS has prepared one for you. To reduce your tax bill as much as possible, make sure you include any permissible deductions or credits.
The sooner you take action on this, the better. The reason for this is that the IRS will continue to charge interest and penalties on the debt until it is paid off or a different agreement is reached.
Tip 3: Make a Payment Schedule
Even if you theoretically have the funds, paying your whole tax payment in one fell swoop may not be feasible. You may find yourself in a perilous financial situation if you write a large check all at once, making future tax payments impossible.
The IRS is a reasonable agency that will frequently agree to an Installment Agreement (IA). Even if you owe taxes for numerous years, you may be eligible for this arrangement. To reduce the amount of interest and penalties that accumulate until your debt is settled, we usually recommend agreeing to pay as much as feasible each month.
You can complete all of the paperwork yourself for lesser balances (under $10,000), but if you owe a big amount, you will certainly benefit from engaging a tax specialist to assist you build your payment plan properly.
Tip #4: Negotiate a Penalty Reduction or Elimination
Tax debt can be substantial on its own, and when you factor in interest and penalties, the amount you owe can skyrocket. The longer a loan is outstanding, the more expensive it becomes as interest accumulates. As a result, a little debt might balloon into a much larger obligation than it was before.
Though the IRS will not award a penalty abatement to everyone, if you can show that you have a compelling reason for not paying your tax bill or for not filing, you may be able to negotiate one. A death in the family or surviving a natural calamity are both valid justifications. Unfortunately, a typical financial difficulty will usually exclude you from this arrangement.
While an abatement has no effect on your principal, it may result in a significant reduction in your balance when interest and penalties are deducted.
Tip #5: Make a Compromise Offer (OIC)
In rare cases, the IRS will agree to take a lower payment than you owe. An Offer in Compromise, or OIC for short, is the name given to this arrangement. An OIC works by allowing you to pay a percentage of your tax debt rather than the full amount. If the IRS agrees, you’ll have a set amount of time to settle your bill before the rest of the debt is forgiven.
The IRS will conduct a thorough investigation into your finances, which might take several months. You will have to be able to prove that you are unable to pay the balance in full in a reasonable amount of time. However, if the IRS does accept your Offer in Compromise, you can save thousands of dollars and start anew with a clean slate.
Avoid Further Delays as a Bonus Tip
When the IRS has turned their attention toward you, there is no relief until you take action toward tax resolution. You will continue to incur penalties until you begin paying your back taxes. Even then, interest continues to be added to your bill at a compounded rate. While dealing with the IRS can be unpleasant, it’s a necessary effect of earning an income in the United States.
In order to take back control of your financial future, you’ll need to handle this matter as soon as possible. At Levy & Associates Tax Consultants, we have a comprehensive team of tax accountants, tax attorneys, and former IRS agents on your side. We can evaluate your situation and make a recommendation for a path to move forward. Contact us at 800-TAX-LEVY to schedule an appointment.