The IRS gives you several choices, if you can't pay your taxes all at once. I talked about options for making monthly payments last time. But what if you can't pay your taxes because something permanent has happened--you've become disabled, you've suddenly racked up massive medical bills, you've been caught up in a natural disaster, you're barely trying to stave off bankruptcy.
Well, there's another option for that, a way to settle your IRS debt called an "offer in compromise."
With this kind of debt settlement, you make an agreement with the IRS that you'll pay less than the total taxes you owe, and the IRS will consider your taxes paid in full.
As you can imagine, the IRS doesn't just settle debt out of the goodness of their hearts. What they're calculating is how much it'll cost to harass you with phone calls and letters, then pay a lawyer to sue you, and after that, take the trouble to get a lien or levy on your bank account, car, or wages and eventually collect what you owe.
If they think they might lose the lawsuit, or that you don't have enough assets or future earning potential to make a levy worthwhile, they figure it's more profitable to skip all that and just settle for what you can pay. How generous.
Still, it's less hassle for you, too, compared to a lawsuit or levy. If you think debt settlement with the IRS sounds like a worthwhile route to take, here are the three reasons the IRS might grant it:
1) There's doubt whether you actually owe the taxes. As complicated as the tax laws are, there are plenty of iffy situations where a judgment could go either way. A tax attorney can advise you how strong your case is, and whether the IRS might rather settle instead of sueing and taking the chance of losing.
2) There's doubt that the IRS could collect the money. If the debt is more than your assets, you have other debts and your income is low, well, not even the IRS can get blood out of a turnip.
3) "Effective tax administration." This is IRS double-talk for "we'll be nice." They don't want to admit it, but even if you clearly owe the money and you have the assets to pay, sometimes, on a good day, if nobody's looking, the IRS allows its agents to be nice and settle the debt. This might fit in a case where the assets that could be used to pay the debt are being used to provide support for a permanently disabled person or are set aside for the future medical bills of a handicapped child, or otherwise would be "unfair and inequitable because of exceptional circumstances," as the IRS says.
How It Works
If you're thinking about an debt settlement with the IRS, you might want to get a professional involved, especially if a lot of money is at stake. But in theory, you could do it all yourself. Whether you do it or a pro does it for you, here are the steps. I'm not a tax pro, so don't take this as gospel, but it gives you the general idea. Things may change, so check on the current IRS website to see what the latest rules are.
If you want to propose debt settlement because there's doubt as to your liability, you use this form, plus this form (or the B version if it's for a business). There's no fee to propose an offer in that case.
If you want to propose debt settlement for one of the other two reasons, you use this form, plus this form (or the B version if it's for a business). There's also a $150 application fee. However, if your income is below 250 percent of the current poverty guidelines, you can get the fee waived by submitting this form along with the others. You might still have to send some money too, though, so read on.
The amount that you want to settle the debt for, can either be paid in a "lump sum" which the IRS defines as five payments or less, or you can make monthly payments for up to two years or longer.
If you offer a lump sum, you need to include 20% of the amount you're willing to pay. If the offer is rejected, you won't get the money back, but it'll be applied to reducing your tax bill.
If you offer six or more payments, you have to include the first payment with your offer, and if they don't answer in time, you have to make the next monthly payment too when the time comes, while you're waiting to hear from them.
If the IRS accepts your offer, make those payments! If you don't, the IRS can say you're in default and they'll void the lower amount they settled for and go back to demanding the entire amount you owe, with whatever interest and penalties they can tack on. And be sure to file your tax returns in the future, too, because any kind of mess-up in filing or paying will put you in default.
If the IRS rejects your offer, you can appeal. They'll send instructions how to do it. If your application isn't filled out right or you don't include enough money with it or something similar, they'll just return it.
If You Just Ignore Them
If you don't try to work out some kind of payment plan or debt settlement, the IRS can file a Notice of Federal Tax Lien, which means they're claiming a right in any property you own. If you declare bankruptcy or sell your house, they'll get their share. The lien will also show up on your credit report.
They can also use a levy, which means they actually take your car or real estate or whatever, or take the money from your bank account, or attach your wages, including Social Security benefits.
Even if you're accepted for debt settlement, if you want to make payments, the IRS will file a lien anyway just in case. They're such trusting souls. They won't go for a levy, though, and they'll remove the lien when you've finished making your payments.
Be Careful Who You Hire
The advantage of using a lawyer or tax professional for negotiating with the IRS is that he or she can advise you what to say and how much to offer, to have the highest chance of acceptance.
If you do decide to pay a lawyer or CPA or Enrolled Agent, be careful. This is a field rife with scammers who dangle the bait of wiping away most of your tax bill.
Make sure you understand what you're paying for. Will they fill out the forms and your documentation too? The documentation of your assets and income and all that, may be the hardest part. Will they negotiate with the IRS if necessary and help you through an appeal? What exactly are they charging and what happens if the offer is rejected?
Don't let anybody tell you that getting debt settlement with the IRS is easy, because it's not. Ask how many of their clients get accepted, and if they say all of them, they're lying. If they say some fraction under a quarter, that's probably the truth.
Discuss what they'd suggest if your offer is rejected, because it very well may be, and you'll still need to deal with your debt.
Check them out thoroughly online and with the Better Business Bureau or the state attorney general, and be careful of any high-pressure sales tactics.
For someone who really is facing hard times but is trying to stay out of bankruptcy, settling IRS debt with an offer in compromise is a possible solution for a tax bill that can't be paid. But it's certainly not an easy solution, and choosing the wrong company to help you can make problems worse, not better.
Relieved of Taxes
6:21 p.m. March 29
I worked for a company that promised people tax relief through OICs. There are things I could tell you! I'm sorry I ever did. Don't sign up for this with just any company! Make sure it's a company you trust and not one making headlines in ripoffs and compaints!
9:40 p.m. March 29
10:04 p.m. March 29
I'm interested too. Send me an email, and be sure to say what you want private and what can be published.
11:14 p.m. March 30
I'm not the anonymous above, but three years ago we were in debt because of my husband's medical bills and the fact that he couldn't work at his business and we had to shut it down for almost six months with no income coming in. We looked for companies to do this for us and checked out several and some were only trying to sell us like used car salesmen, you didn't even get to talk to the person who would be actually working with you. we went finally with a tax lawyer in the closest city that we coudl actually talk to in person. This really isn't cheap it cost us over a thousand dollars but he helped us document everything and talked to the IRS for us and it saved the shop so we could open up again. You don't know what its like to give up all your privacy to the government until you go through something like this. But you really need to find someone you're comfortable working with and who has your best interest in mind and not just getting money from you andmakng a commission.
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