Common Tax Debt Resolution Strategies You Should Be Using

Overwhelmed by tax bills? Facing penalties and the threat of collections? You’re not alone. Millions of Americans struggle with tax issues each year. But fear not, there’s a path forward! This guide dives deep into common tax resolution strategies, empowering you to take control and achieve tax debt freedom.

Common Tax Debt Resolution Strategies

Facing tax problems can be tough, but there are solutions available. Here is a list of some common tax resolution strategies that your tax attorney can help you look into:

Installment Agreements

An installment agreement allows you to spread out your tax debt into manageable monthly payments over a defined period (typically up to 6 years). [1]

This can be a good option for taxpayers who owe a significant amount of back taxes but cannot afford to pay the full balance in one lump sum.

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Benefits of Installment Agreements

Less Financial Stress: Breaks down your tax debt into smaller, more manageable payments, easing the financial burden.

Avoid More Penalties and Interest: In some cases, making an installment plan can help stop more penalties and interest from being added to the outstanding balance. [2] However, it’s important to confirm this with the IRS during negotiation.

Prevents Collection Actions: While you’re faithfully making payments under a formal agreement, the IRS cannot levy your wages or bank accounts, or file a new Notice of Federal Tax Lien.

Steps Involved in Setting Up an Installment Agreement:

Contact the IRS: You can initiate the process by calling the IRS directly or applying online through Online Payment Agreement tool on their website or by mail by submitting Form 9465, Installment Agreement Request. [3]
Financial Disclosure: Be prepared to provide the IRS with detailed information about your income, expenses, and assets. This will help them determine your ability to repay the debt.
Negotiation: A representative from the IRS will assess your financial situation and propose an initial installment agreement. You can negotiate the terms, such as the monthly payment amount and the repayment timeframe.

Tips for Negotiating Favorable Terms:

Gather Documentation: Come prepared with documentation to support your income, expenses, and financial hardship (if applicable).
Make a Reasonable Offer: Look into what terms are usually included in installment agreements and offer a monthly payment amount that you can actually afford while still being reasonable.
Be Proactive and Courteous: Maintain a professional and respectful demeanor throughout the negotiation process.
Consider Professional Help: A tax solutions company or tax attorney can represent you during negotiations and ensure you receive the most favorable terms possible.

Partial Pay Installment Agreements

A Partial Payment Installment Agreement (PPIA) is a monthly payment plan option for taxpayers who have a tax balance but are unable to fully pay the balance within the remaining time the IRS has to collect, called the Collection Statute Expiration Date (CSED). [4]

Offer in Compromise (OIC)

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows you to settle your tax debt for a lump sum payment that is less than the total amount owed. The IRS considers various factors, including your income, assets, and ability to pay, when evaluating your offer. [5]

Eligibility Requirements

For an Offer in Compromise, you can apply if you:

Filed all required tax returns and made all required estimated payments
Aren’t in an open bankruptcy proceeding
Have a valid extension for a current year return (if applying for the current year)
Are an employer and made tax deposits for the current and past 2 quarters before you apply. [5]

Process of Applying for an OIC

The steps you need to take to apply for an OIC can be long and complicated:

Gather Documentation: Compile documents that support your financial hardship and any arguments for doubt as to liability.

Complete the Application: IRS Form 656: This form outlines your offer amount and details your financial situation. You can find the Form 656-B, Offer in Compromise Booklet on the IRS website.[6]

Application Package includes

Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms
Form 656(s) – you must submit individual and business tax debt (Corporation/ LLC/ Partnership) on separate Forms 656
$205 application fee (non-refundable)
Initial payment (non-refundable) for each Form 656. [5]

Choose Payment Option: Your first payment will depend on your offer and the option of payment you pick:

Lump Sum: Pay an amount of 20% of your offer when you submit your application. If your offer is accepted, we’ll send you confirmation and details on settling the remaining balance in up to five installments.
Periodic Payment: Make an initial payment with your application, then continue with monthly installments while IRS reviews your offer. If accepted, your monthly payments will continue until the full amount is paid. [5]

Application Fee: There is a non-refundable application fee associated with submitting an OIC.

$205 application fee (non-refundable)
Initial payment (non-refundable) for each Form 656. [5]

Negotiation and Review: The IRS will review your application and may counter your initial offer. Tax experts can help you work through the negotiation process.

Decision and Outcome: The IRS will ultimately decide to accept, reject, or counter your offer.

Process of Applying for an OIC

Pros:

Potentially settle your tax debt for a significantly reduced amount.
Stops further penalties and interest from accruing on the outstanding balance once your offer is accepted.
Provides a clean slate with the IRS once the agreement is fulfilled.

Cons:

The application process can be difficult and time-consuming.
There is no guarantee that the IRS will accept your offer.
An accepted OIC may be reported on your credit report as a settled tax debt, potentially impacting your credit score.
You may be required to pay the full amount of your offer upfront.

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Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status is a temporary suspension of collection efforts by the IRS. The IRS may grant CNC status if you’re facing financial hardship and cannot afford to make payments on your tax debt. While in CNC status:

The IRS cannot levy your wages or bank accounts.
They will not file a new Notice of Federal Tax Lien.

This status provides temporary relief but doesn’t eliminate your tax debt. You’ll still be responsible for the full amount owed, and penalties and interest may continue to accrue. [7]

Requirements to Qualify for CNC Status

Qualifying for CNC status requires a thorough financial analysis to demonstrate your hardship. This typically involves providing documentation of your income, expenses, and assets. A tax professional can assist you in gathering the necessary documentation and presenting your case to the IRS.

Innocent Spouse Relief

Who Can Qualify and Under What Circumstances

Innocent spouse relief is a provision in the tax code that can protect a spouse from being held liable for the tax debts of their former spouse (or current spouse, in limited situations). [7] To qualify, you must meet the following criteria:

You filed a joint tax return with your spouse.
You were unaware of your spouse’s underpayment of taxes or fraudulent tax activity.
You reported all of your income on the return.
It would be unfair for you to be held responsible for your spouse’s tax debt.

Benefits of Relief

If granted innocent spouse relief, you can be relieved of some or all of the tax debt owed on the joint tax return. This can be a significant financial benefit and provide much-needed relief.

Process for Requesting Relief

The process for requesting innocent spouse relief involves filing IRS Form 8857, “Request for Innocent Spouse Relief. [8] This form is complicated, and you need to include a lot of information to back up your claim. Here’s a general overview of the steps:

Gather Documentation: Collect documents that prove your financial situation, your lack of knowledge about your spouse’s tax issues, and any efforts you made to stop the underpayment.

Complete Form 8857: This form outlines your situation and requests relief. You can find the form and instructions on the IRS website. [7]

Submit the Form and Supporting Documentation: Mail the completed form and documentation to the IRS.

Negotiation and Review: The IRS will review your request and may request additional information. Consider seeking professional guidance during this process.

Decision and Outcome: The IRS will ultimately decide to grant relief partially, fully, or deny your request.

Important Considerations and Potential Challenges

Obtaining innocent spouse relief can be challenging. Here are some important considerations:

The burden of proof lies with you to demonstrate your eligibility for relief.
The IRS considers various factors, including your financial situation and marital status.
The process can be lengthy and complicated.

Penalty Abatement

Penalty abatement refers to the process of requesting the IRS to forgive or reduce tax penalties associated with your tax return. The IRS understands that mistakes happen, and they may be willing to waive penalties if you can demonstrate a legitimate reason for non-compliance. Unlike an Offer in Compromise, which applies to the entire tax debt, penalty abatement focuses solely on reducing or eliminating tax penalties.

Why Consider Penalty Abatement?

Tax penalties can add a significant burden to your overall tax debt. Penalty abatement can help alleviate this financial strain and bring your tax situation closer to resolution. Here are some reasons why pursuing penalty abatement may be a good option:

Reduced Tax Liability: Even a partial abatement of penalties can result in a significant reduction in your overall tax debt.

Fresh Start: Having penalties abated can help you move forward with your tax obligations on a clean slate.

Additional Considerations

While the above options are some of the most common tax resolution strategies, it’s important to remember that every situation is unique. Here are some additional considerations:

Tax Debt Amount: The most suitable resolution strategy will depend on the total amount of your tax debt. For smaller debts, an installment agreement might suffice. For larger debts, exploring options like Offer in Compromise (OIC) may be necessary.

Tax Situation: It is strongly advised that you seek legal counsel from a tax attorney with experience in tax resolution if your tax situation entails complicated matters such as business taxes, unfiled returns from several years, or possible tax fraud accusations.

Time Constraints: The IRS may impose deadlines for taking action on your tax debt. If you’re facing a tight timeframe, consulting with a tax professional can ensure you meet all deadlines and explore the most effective resolution path.

Why Get a Tax Attorney for Penalty Abatement?

Dealing with tax problems can be stressful, and it can be hard to figure out the complicated rules set by the IRS on your own. Working with a tax solutions company or lawyer can be helpful for the following reasons:

Expertise and Knowledge

Tax experts know everything there is to know about tax laws, rules, and how the IRS works. They can look at your situation, figure out what the best thing to do is, and walk you through the whole tax resolution process.

Negotiation Skills

Tax professionals are skilled negotiators who can represent you effectively when dealing with the IRS. They can look out for your best interests and try to get you the best result possible, whether that means negotiating a lower Offer in Compromise amount, an installment plan, or penalty abatement.

Reduced Stress and Time Saved

Getting your taxes settled can be hard and take a lot of time. A professional tax professional can do the hard work for you, saving you time and stress. They can communicate directly with the IRS on your behalf, freeing you to focus on other priorities.

Potential Cost Savings

There are some costs involved in hiring a tax expert, but in the long run, their knowledge can often save you a lot of money. They will help you look at all of your options, which could save you money on penalties and interest or help you get a good settlement that you would not be able to get on your own.

Get the Expert Help You Need for Tax Resolution

Our team of tax experts at Lifeline Tax Solutions is here to help you get through the complicated process of tax resolution. We know how hard things are for you, and we are here to help you get through them.

Don’t wait any longer. Contact us today for a free consultation and let’s discuss how we can help you resolve your tax issues.

References

Common Tax Debt Resolution Strategies You Should Be Using