Owing money to the IRS can be a stressful and scary experience. Most people who fall behind on their taxes lack the resources to bring their tax accounts current, often leaving them feeling helpless. This need not be the case.
There are multiple ways to settle tax debt, and the IRS has created additional options for delinquent taxpayers affected by the COVID-19 crisis.
Some methods of settling tax debt require full payment, which can be done in a lump sum (should you have a windfall) or through a payment plan.
In certain cases, the IRS will agree to an offer in compromise. The agency may agree to waive interest, penalties and even some of the tax owed. Some taxpayers also qualify for non-collectible status because they simply lack the funds to make any payments, a situation that has become far more commonplace since the pandemic struck.
Regardless of the method used to resolve tax debt, it is vital to start the process by filing any past due returns and analyzing your financial situation to determine which IRS programs provide the most logical solutions for putting an end your tax troubles.
Avoid the Substitute Return
The IRS files a substitute return when a taxpayer has failed to file on time. IRS agents have access to enough information to estimate the gross income of most borrowers; however, they do not know all the deductions you qualify for. Because of this, they file the substitute return with the minimum deductions. This favors the IRS and may lead to taxpayers being charged interest and fees on tax debt they may not owe.
Even if you cannot pay the taxes now, filing any past due returns ensures you are not overcharged.
For the most part, the IRS allows payment plans provided the taxpayer has the financial capability of keeping up with them. If you have the means to make a monthly payment to the IRS and still cover your expenses, an installment plan may be the simplest way to keep the IRS off your back.
Once you are on an installment plan, the IRS suspends any collection activity. Collection activity can include tax liens, wage garnishments and property seizures. If you can afford to make the payments, you can put aside any worries about collections activity by filing for a payment plan.
COVID-era Installment Plan Changes
The IRS has recognized that many taxpayers have been pushed into temporary financial hardship by the pandemic and lockdowns. To address this issue, the agency offers relief under the People First program. Under these new terms, taxpayers can temporarily delay installment plan payments without penalty. Also, those seeking an offer in compromise are not required to make payments while the IRS reviews their requests.
Offer in Compromise
The offer-in-compromise program seeks to give taxpayers a fresh start by clearing away tax debt once and for all. To be eligible, your financial situation must be such that paying the full taxes and penalties is impossible. If the IRS sees that it can only collect if the amount is lowered, it generally looks favorably on offers in compromise, giving struggling taxpayers a good chance at approval.
Uncollectable status stops all aggressive collections activity because the IRS has learned you have no means with which to make any payment. To qualify, you must provide documentation proving that your expenses exceed income or that any payment would cause hardship. Uncollectable status provides an alternative to an offer in compromise. However, it does not resolve the tax debt in full.
Instead, uncollectable status remains in effect for as long as making payments remains impossible. Once you can pay, the IRS may try to collect, at which point an offer in compromise or installment plan may be appropriate.
Uncollectable status can last for the entire statue of limitations on the collection of back taxes, at which point the IRS no longer has legal recourse. As of 2020, the statutes of limitations run for 10 years after the tax was assessed. Note that if you fail to file, the statutes began to run only after the IRS files a substitute return or if you file a late return and the tax is officially assessed.
Tax trouble can wreck your future and leave you facing uncertainty. Though it may take some time to resolve tax debt, you can stop the uncertainty by taking steps to resolve the problem with a realistic plan. Most delinquent taxpayers succeed in resolving their tax issues and feel much better when they do.
If you are experiencing serious tax debt, you should take immediate action to resolve your tax problem. The Law Offices of Peter C. Rageas can help. Our tax law firm Detroit, Michigan has been helping clients throughout the Tri County area and beyond for over 20 years. Protect yourself and know your rights! Contact us today for a case evaluation.