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Most people know that there are few things is in this life as certain as death and taxes. However, each year, millions of people are still surprised by the amount of taxes they owe. Despite the absolute certainty of tax season, many of us can settle IRS tax debt for a fraction of what we owe if we meet some basic criteria. Here are some ways you may be able to qualify for a dramatic reduction of the taxes you owe.
1. Qualify For An Innocent Spouse Program
If you are married and filing a joint tax return with a spouse, you should be aware of certain issues that could arise. Even with a legal separation, spouses can still be held responsible for underpayment of taxes or dishonesty when filling out a tax return. This is not to say that options do not exist to trump this responsibility. If a former spouse has hidden a tax liability, responsibility to pay off that liability may not exist. Additionally, if your partner shows that you failed to report taxable income, took improper deductions, or otherwise dishonestly filed your taxes, your partner may be qualify to seek relief from your shared tax liabilities.
To be eligible for this type of relief, a wronged spouse must demonstrate that they were legitimately misled and had no knowledge of the improper tax filing. Moreover, that same spouse has a limited amount of time (usually two years) from the date the IRS first tried to collect the unpaid taxes, to ask for innocent spouse relief. Additional tax relief provision for couples are as follows: Equitable tax relief is an option for spouses that do not qualify for innocent spouse relief. Under limited circumstances, a spouse can use this option if they can prove that inaccuracies on a joint tax return were the legitimate responsibility of the other spouse. This option can also be used when tax reported on a joint return is correct but was not paid in a timely manner with the tax return.
Separation of liability also offers an exemption for legally separated or divorced partners. In certain instances, partners who have not cohabitated for 12 months prior to filing taxes may be eligible for a certain amount of tax relief. This will depend on the amount owed.
If you would like to see if you qualify for an innocent spouse program, it is important to do your research, make sure you document your specific circumstances in writing, and seek out the assistance of a trained and experienced professional.
2) Consider A Compromise
You may have seen television commercials implying that certain companies can help you pay off tax debt for pennies on the dollar. These ads are often misleading. Yes, this is an option, but the IRS has a special form that must be completed to take advantage of it. You will also be responsible for a filing fee of nearly $200 and providing all documents as requested in a timely manner.
Many tax payers are not aware of this option, but a settlement in compromise in gaining popularity with people who have fallen behind on their taxes. So what exactly does that mean to broker a compromise with the IRS? Under certain circumstances, the IRS will allow you to pay a portion of what you owe in back taxes with the remaining amount written off by the IRS.
In order to take advantage of this option, you must provide written evidence that paying what you currently owe, is a hardship. Next, you will have to propose an offer to pay the reduced amount owing in one lump sum or in installments. You should also be aware that the required form includes detailed information regarding spending habits, income, assets, investments, and any equity you may have in your possessions.
When evaluating your completed application, the IRS will look at your net worth and credit. Your income and monthly expenses will then be balanced to calculate what payments you can afford each month. You can’t apply for a compromise if you have an open bankruptcy filing. And finally, taxpayers that qualify for a settlement in compromise, have two years to settle any taxes owing per the terms of their agreement with the IRS.
3. Check The Statute Of Limitations
Are you worried about your ability to pay taxes owing from previous years? If so, you should know about something called a statute of limitations. This principle exists when it comes to the payment of taxes and dictates that the IRS is limited to 10 years to collect taxes, interest, and penalties after the date of assessment. If your taxes happen to become due before that ten year limited period, you may still be able to resolve your tax case without paying a dime.
If the ten year deadline is close, a tax relief firm or attorney can assist with filing paperwork to pause tax levies, liens or seizures before statute of limitation deadlines. This will allow you to wait it out until the statute period passes and the IRS can no longer move to collect your past due taxes, This can be a risky strategy though. If it is determined that you do not qualify, unpaid interest and penalties increase and you could be liable for a massively increased payment to the IRS.
4. Try An Installment Plan
Not many of us have the immediate funds to write out a check to the federal government when we owe a large amount of income tax. One option is to pay with an installment plan. This payment method is comparable to a home mortgage. However, as opposed to handing money over to a mortgage lender each month, the IRS gets paid instead.
In order to take advantage of an installment plan with the IRS, tax payers must:
• Be current on filing all taxes.
• Have state income taxes mostly paid off.
• Make agreed upon monthly minimum payments.
Although the IRS makes every effort to compromise when collecting the money you owe, truant taxpayers who are unable to make timely monthly payments, will be disqualified from making installment agreements.
Additionally, IRS representatives will not consider you for installments if you are more than $50,000 behind on your taxes. If installment payments sound like a good option for you, try consulting an attorney or a specialist who can help you effectively review your options and negotiate an affordable payment plan.
5. Be Sure Your Taxes Are Collectible
Another option for taxpayers who cannot afford to pay their taxes, is a temporary hold on the amount you owe. If you qualify, the IRS will label your taxes as “not collectable” and payment will be temporary paused. This option only lasts for as long as you are unable to pay, but it does stop tax levies, wage garnishments, and liens on your property for a limited period of time.
6. Hire A Professional Tax Relief Company
One of the more popular options used by truant tax payers with the funds to afford it, is to hire an attorney or professional firm to resolve your IRS issues. If the amount you owe is high and the issues surrounding your return are complex, this might be the best option for your unique situation.
Experts suggest that tax debt of less than $10,000, should be resolved between the IRS and the taxpayer directly. If your debt is greater than $10,000, and your issues are complex, a lawyer or tax professional might be a better option for an expeditious resolution.
7. Alternative Options
Although experts do not recommend this option for everyone, some consider it smart to pay down tax debt with a credit card. This will depend on the amount you owe, your individual interest rates, and if your cards offer rebates or cash back options.
If this is an option you are considering, you should be aware that adding credit card debt that can’t be paid off in a month is usually a bad idea unless it allows you to avoid significant IRS penalties. Before you implement this plan, be sure to make a realistic budget for yourself so that you can afford to make the payments for the new debt you are incurring.
8. Bankruptcy
One last option that some tax payers resort to is Bankruptcy. Although this option can eliminate tax debt, there are limitations. Not all tax payers qualify for a discharge of past due tax debt. Bankruptcy can also have some severe financial consequences that knock your credit rating for a loop and make it challenging to borrow money for years after. You may also be forced to liquidate assets to pay off the amount you owe to your creditors.
If you are a member of that unfortunate group of taxpayers that cannot afford to pay the amount owing, there is hope. Burying your head in the sand is not a good option since the IRS will almost always collect the amount you owe with penalties and interest. Take action and speak to an experienced professional for practical advice as soon as you can.
This year’s tax season may have brought you an ugly surprise that you are not prepared for. Regardless of the amount of money you owe or how prepared you are to pay that amount, be sure to carefully consider your options. You have more available options than to simply write a check that empties out your bank account and leaves you with serious financial concerns. First and foremost, consider consulting a professional tax relief firm today. Your options may be much more favorable than you thought they would be.
Sources
"Tax Debt Relief EXPLAINED: How to SETTLE With the IRS [BY YOURSELF]" - Logan Allec
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Frequently Asked Questions
What is the deadline to request innocent spouse relief after the IRS begins collection efforts?
A wronged spouse generally has two years from the date the IRS first attempted to collect the unpaid taxes to request innocent spouse relief. To qualify, the spouse must demonstrate they were legitimately misled and had no knowledge of the improper tax filing. Documenting your specific circumstances in writing and consulting a tax professional are strongly recommended steps before applying.
How does a settlement in compromise work, and what does it cost to apply?
A settlement in compromise allows qualifying taxpayers to pay a reduced portion of their back taxes, with the IRS writing off the remaining balance. Applying requires completing a special IRS form, paying a filing fee of nearly $200, and submitting detailed documentation about your income, assets, investments, spending habits, and any equity in your possessions. Taxpayers who qualify have two years to settle the taxes owed under the terms of their agreement, and those with an open bankruptcy filing are not eligible to apply.
How long does the IRS legally have to collect unpaid taxes, interest, and penalties?
The IRS is limited to a 10-year window to collect taxes, interest, and penalties, starting from the date of assessment. If that 10-year deadline passes, the IRS can no longer move to collect the past-due taxes. However, attempting to wait out the statute of limitations is considered a risky strategy, since failing to qualify for any filing delays could result in significantly increased interest and penalties.
What are the requirements to qualify for an IRS installment payment plan?
To qualify for an IRS installment plan, taxpayers must be current on filing all taxes, have state income taxes mostly paid off, and commit to making agreed-upon monthly minimum payments. Taxpayers who are more than $50,000 behind on their taxes will not be considered for an installment agreement. Additionally, those who miss timely monthly payments risk being disqualified from the installment arrangement entirely.
Can a legally separated spouse receive any tax relief if they didn't live with their partner before filing?
Under the separation of liability provision, legally separated or divorced partners may be eligible for a certain amount of tax relief depending on how much is owed. In certain instances, partners who have not cohabitated for at least 12 months prior to filing taxes may qualify for this relief. Spouses who don't meet the criteria for innocent spouse relief may also explore equitable tax relief, which can apply when inaccuracies on a joint return were legitimately the other spouse's responsibility or when taxes were correctly reported but not paid on time.
About the Author
Tax Professional
Jessie Seaman is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.