5 Ways you can Settle Back Taxes
When you need to settle IRS back taxes there are many options. It is best that you learn all available options and see what fits your individual situation the best before setting up a plan of attack.
Some important factors to figure out prior to making your decision of what back tax settlement method to use are your tax amount owed, amount you can afford to pay, the amount of assets (equity) you have, and if you would be able to pay amount in full if you just had more time. Below are the 5 most common methods to settling back taxes.
Offer in Compromise
This method allows individuals to settle IRS back taxes for less than the total amount originally owed. Whenever you hear the saying, "Settle for Pennies on the Dollar", this is the method that is used.
It shouldn't come to a surprise that this is the hardest settlement to reach with the IRS. The IRS has strict requirements to qualify for an offer in compromise. The purpose of an offer in compromise is to find a compromised amount that works for the tax payer and the IRS. What this means is that the IRS will settle your amount for less money if you can show that it is not worth the time of the IRS to try to collect from you because it will cost them more to try to collect than the amount that they would eventually end up collecting. An offer in compromise would be a good method of settlement if your total equity you have in assets is worth less than the tax amount owed.
An installment agreement is the most common method for individuals to settle their back taxes. With an installment agreement you will be required to pay monthly payments towards the tax amount owed in a period of less than 3 years. With an installment agreement you will still have to pay interest on the amounts owed plus and any penalties you may have received, so in the end up paying more than the original tax amount owed. An installment agreement should be used if payments cannot be made in full but you do have the ability to pay them off over time in smaller monthly payments.
Delay the IRS
If you just need more time to pay the total amount due this can easily by done by using your understanding of the IRS system to your advantage. When the IRS realizes that you owe back taxes, they will begin their sending their automated notices. There are a series of letters that the IRS sends before it actually takes actions against individuals to collect. Typically the IRS sends an original assessment letter stating the amount of tax owed plus any interest and penalties then it will send a series of four CP Letters (CP1-4, as noted in upper right of letter). Typically once you start receiving these letters you have 4 to 6 months before the IRS takes collection action if nothing is done on your part. To delay the IRS and buy yourself more time all you have to do is write a letter back to the IRS in response to the assessment notice or CP notices and state that you cannot pay at the current time and ask for a 45 day extension. If you still cannot pay by this time you can simply repeat the process to buy more time. Just know that once you receive IRS notice CP-504, you will not have much more time until they take collection actions against you.
Currently Not Collectible
This method doesn't really settle your back taxes, but it puts a hold on collections. When you receive currently not collectible status, the IRS will temporarily stop collection activities against you and they will require that you submit an updated financial statement every year to see if your situation has improved enough for them to go after you and collect. One thing to keep in mind here is that the statute of limitations is still running and the IRS has 10 years to collect back taxes from the year they were filed. If 10 years passes and they have not collected, you no longer owe that amount.
Tax professionals are many times the most efficient way to get the best settlement with the IRS. Tax professionals have the highest success rate for getting offer in compromises settled and for the least amount of money, have the best methods for setting up installment agreements that work best for individuals that cannot pay, or finding other methods that would better suit the individuals for their particular situation. Most tax professionals will offer a free consultation to give you your options, likely outcomes, and cost. It is best to talk to multiple tax professionals to find the one that you feel gives the best suggestions, you get along with best, and gives you a reasonable price.
Every year tax laws only continue to get more complex and this causes more people have problems with back taxes. Thousands of people settle their unpaid back taxes with the IRS. Understanding your options and taking action early is always the best to prevent more future penalties and interest.