How can I settle my tax debt?

Four common “reasonable collection alternatives” are recognized by courts: payment in full, an installment agreement, an offer in compromise, and a temporary delay of collection.

Payment in full means exactly what it sounds like, while installment agreements and offers in compromise (OIC) are ways of paying down your tax debt.

If you are current on all your tax returns and your debt is manageable – but you just need a little more time to pay it off – you can request an installment agreement. With this method, you can make payments each month until your debt has been satisfied. However, you will have to pay a fee to set up the plan, and you will also have to pay interest and a late penalty.

Will the IRS ever forgive or negotiate tax debt?

It is within the IRS’ best interests to efficiently collect tax on behalf of the government, encourage voluntary compliance, and promote reasonable fairness and consistency. To that end, the IRS does allow certain taxpayers to negotiate their debt to mutually benefit the IRS’ collection goals and the taxpayer’s reasonable ability to pay. While the IRS will not traditionally forgive debt, they are willing to negotiate. Because of that fact, debt settlement and resolution remain important assets for taxpayers looking for much needed relief for their situation. 

What is an offer in compromise?

An OIC represents an agreement between you and the IRS, and it means you can settle your debt for less than you originally owed, so long as you meet certain requirements:

  • Paying your tax debt would create an economic hardship.
  • You have unusual expenses due to catastrophic issues such as a seriously ill family member, you live in a disaster area, etc.
  • Your income has dropped substantially due to unforeseen circumstances.
  • You have little or no assets, or your assets have little or no equity.

Before the IRS can consider your offer, you must have filed all required tax returns. You are not eligible if you are in an open bankruptcy proceeding.

In addition to the traditional OIC, there is an OIC for doubt as to liability. This may apply when you dispute the existence or amount of a tax debt.  If the existence or amount of the debt has already been established by a final court decision, or is based on current law, doubt as to liability cannot be considered.

What is an “innocent spouse?”

You may be an innocent spouse if your spouse, or former spouse, made an error on your joint return that causes your tax liability to be understated. If you believe your spouse should be the only one responsible for paying all or part of the tax owed, you can apply for relief from these unpaid taxes by filing Form 8857, Request for Innocent Spouse Relief. However, there is no guarantee of tax relief for innocent spouses.

What is an “injured spouse”?

Like an innocent spouse, an injured spouse can request relief from some liability of the other spouse. In either case, there isn’t a guarantee the IRS will agree to assign the responsibilities of the debt to the other spouse.

The main difference is that while innocent spouse relief is for something on the jointly filed return, injured spouse relief is for a past-due debt the other spouse owes. If the IRS has, or is expected to, apply the refund on the joint return to a spouse’s debt, the injured spouse may file Form 8379, Injured Spouse Allocation, to request their portion of the tax refund.

What if I can’t pay the IRS the amount that I owe?

If you are experiencing economic hardship and you would have trouble paying essential living expenses if you paid off your tax debt, the IRS may consider the debt “Currently Not Collectible.” This would essentially give you some time to pay the debt, as the IRS would stop trying to collect it.

However, the debt still exists, meaning it will accrue penalties and interest. This measure also may not stop the IRS from placing a lien on your property.

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