Many taxpayers can face serious penalties when they are unable to pay their outstanding tax bills on time. According to a study carried out by The U.S. Internal Revenue Service in 2018, Americans owed approximately $131 billion in penalties, back taxes, and interest. People may be falling behind their taxes due to the experience of disruptions like loss of job, disability, or divorce. While some people’s lives are just out of control, and they feel overwhelmed by the paperwork and the tax process. Businesses can fall behind on their taxes as well due to closure, losses, increased costs, or illiquidity. However, the IRS can react by seizing personal or business assets and imposing fines. If you can’t pay your taxes and have decided to resort to tax settlement, here’s how to deal with the process.
Tips To Deal With Tax Settlements
Declare Not Collectible Status
People who haven’t suffered a severe financial crisis or permanent loss of income and have an expectation that they can pay their outstanding tax bills and living expenses within a few years can choose to go into a ‘currently not collectible’ status. Choosing this tax settlement option may be a good decision as the IRS and Tax Court cannot force you to pay the taxes if they have approved your status. However, penalties and interest payments may still be charged.
If you owe an amount that doesn’t exceed $50,000 in taxes and penalties and are not late on filing your tax returns but need more time to cover the balance, an installment agreement tax settlement can be accepted. This is a payment plan that allows you to:
- Make monthly payments from savings accounts in the form of installments.
- Make the payments over an extended time period.
- For business corporations, balances over $10,000 must be paid by Direct Debit.
- For individuals, balances over $25,000 must be paid in Direct Debit.
- Choose a short-term or a long-term payment plan; although you have to pay a setup fee for Installment Agreement programs.
Making An Offer In Compromise
Sole proprietorship and partnership businesses are subject to asset takeovers as well because they don’t have a separate legal identity or a limited liability. An offer in compromise is the best option for most people as it will allow you to settle your outstanding tax balance less than the recorded amount. However, extensive paperwork and negotiation are required, so your action plan here should be to hire a tax settlement company to help you save so much time and money and relieve your stress. The IRS is one of the most difficult creditors that many people have to deal with, as it has the authority to seize your assets and take extreme measures. Seeking help from professionals who are familiar with the IRS system and procedures can help you deal with tax settlement and reach the best solution, by negotiating for you and conveying your financial situation.
The eligibility criteria for a waiver or reimbursement is that an individual must be below 250% of the federal poverty level or low-income taxpayers. If you are rendered a low-income taxpayer, the user fee is waived, under one condition; that you pay using electronic payments methods and under the DDIA or Direct Debit Installment Agreement. If you are also unable to make these electronic payments, you will be reimbursed the user fee when completing the installment agreement. When you are identified as a low-income taxpayer in the IRS system, an online payment tool will calculate the application fee according to your current income.
Penalty Relief, also known as Penalty Abatement is an administrative relief from interests and penalties under the First Time Penalty Abatement policy. To qualify for penalty Abatement, you may have failed to pay on time or file a tax return. The First Time Penalty Abatement policy states that:
- You have filed all required paperwork and are up to date on all tax return procedures.
- You have requested an extension of time to file.
- You have received false advice from the IRS.
- You have arranged to pay the outstanding balance due.
In these cases, penalties and interest charges can be reduced or even omitted. Yet if there’s a failure to pay the unpaid balance, interest will continue to accrue till the amount is covered.
Tax settlements can be pretty hectic and stressful. Nevertheless, after reading all about the options the Tax court can resort to during a tax settlement case, you can be more confident when dealing with this daunting process. Make sure to seek help from professionals so that you are able to conduct the full due diligence process when appealing for a tax settlement.