Take a look at the following three words:
On their own the preceding 3 words are very innocent, even positive in some respects. But combine those 3 innocent words in a specific order and you get a phrase that strikes fear in the heart of most: Internal Revenue Service. See, a little shiver ran up your spine when you read those words, right? Well, there is really no need to fear. If you are one of the xx people in the U.S. who has received a notice or letter from the IRS saying that you owe them money – read on! You’re in the right place as I am going to tell you how to start your journey OUT of TAX DEBT!
Let me start by pointing out that you are NOT a bad person. Sometimes, bad things happen to good people. All it takes is an untimely illness or death in the family, an accident, a divorce, job loss, or even fear of the unknown to cause you to rack up tax debt. I want you to stop living in fear that the IRS is going to come knocking on your door and haul you off to jail – and there are tools you can use to make sure you keep them at bay. Even if you legitimately owe the tax, but simply cannot afford to pay in full you have 6 effective tools to use to negotiate and pay your balance with the IRS:
Tool #1: Penalty Abatement
You may be surprised to learn that a good chunk of your tax debt is made up of penalties and interest, in addition to the tax that you actually owe. Yep, the IRS actually assesses penalties and interest for filing your return late and/or paying the tax late – as if the actual tax alone wasn’t enough! But, my friends, there is hope. The IRS provides 2 ways to remove, or abate, a portion (in some cases ALL) of the penalties:
1. First Time Penalty Abatement – simply call the IRS and ask if you qualify for a first time penalty abatement. Generally, you will qualify for something, as long as you have filed all required tax returns, paid or arranged to pay any tax due (installment agreement, discussed below) and have had no “significant” penalties assessed in the 3 years prior to the period you are requesting abatement. This is one of the most overlooked tools available to taxpayers. According to a 2012 study by the Treasruy Inspector General for Tax Admininstration, 92% of penalties that qualified for FTA were not abated because the taxpayers were unaware of this option.
2. Reasonable Cause Penalty Abatement – this method is a bit harder as you have to prove why you are entitled to a penalty abatement, in other words, what extraordinary event occurred that prevented you from filing on time or paying taxes due on time. An example might be the death of an immediate family member, unexpected loss of a job, a major car accident, a natural disaster such as a flood/hurricane. These are just a few “acceptable” reasons. You will need to have physical documentation to prove your case (insurance papers, death certificate, etc.)
Tool #2: Installment Agreement
Guess what? The IRS does not want all of your money! Well, they do, just not all at one time. They provide options to pay your balance over time, on a monthly basis. This tool is fairly simple to use – in most cases, the IRS will provide you with what they will accept as a minimum monthly payment and they allow you to pay this amount until the tax debt is paid in full. Be careful here though, as penalties and interest continue to accrue on the balance as long as it’s out there. If you’re not paying enough, it’s quite possible that the balance barely moves as your payment is only covering the penalties/interest and not even touching the tax itself!
It’s also possible that YOU can tell the IRS how much you want to pay on a monthly basis. They may not like it, but in some cases they are required to take your requested amount. You can set up your installment agreement a couple of ways:
1. Online – this is the easiest method. Just visit https://www.irs.gov/individuals/online-payment-agreement-application. The instructions are pretty easy to follow. The online method will only work if you owe $50,000 or less (including penalties and interest) and you MUST have filed all required tax returns.
2. Via phone – call the IRS and a representative will walk you through the process. It literally can take 15 minutes or less (not including the hold time to actually speak with a rep – this can take as long as an hour!).
3. By Mail – you will need to fill out form 9465 and mail it in.
How long can you pay on an installment agreement? Well, if all you need is 6 months, you can ask for that. But if needed, the IRS can go out several years.
Oh yeah, almost forgot, there is a fee of $120 to get the installment agreement set up. However, the IRS will reduce this fee to $52 if you set up to have payments auto-drafted. And for those who are really on hard times, fee is waived altogether (you have to meet income standards).
Tool #3: Partial Pay Installment Agreement
This is quite a lovely tool, and here’s why: most people don’t know that the IRS generally has 10 years to collect on a tax debt. After that 10 year period, they can no longer collect on this debt (this is their rule, I’m not making this up!) – the tax, along with all those nasty penalties and interest literally fall of the face of the earth never to be seen again!
This tool is just like tool #2, but with a twist! The IRS allows you to pay monthly payments (spoiler alert, you’re going to have to qualify to use this tool) based on how much you can AFFORD to pay. The amount is typically lower than the minimum amount required to fully payoff the tax debt. This option requires a little more work, as you actually have to PROVE that you can only pay a certain amount (you may be asked for paystubs, bills, etc.).
Here’s an example: let’s say you owe the IRS $20,000 and the debt is already 3 years old – and you prove that you can only pay $100 a month over the next 7 years (the amount of time remaining that the IRS can legally collect) – that’s $8,400. You faithfully pay that $100 and 7 blissful years pass – at the end of that 7 year period, the remaining balance of $11,600 ($20,000 – $8,400) simply rolls off of the IRS system. You just saved yourself $11,600 in taxes my friend!
The downside? Anytime during the remaining 7 year period the IRS can come back and make you PROVE that you still can only afford a $100 payment. If they calculate that you can afford to pay more, they will increase your monthly payment and ultimately lower your overall savings.
Tool #4: Currently Not Collectible Status
You probably have never even heard of this tool as it may not be suitable for everybody, but for those who qualify it can be a real gem. To qualify for Currently Not Collectible Status (also called ‘CNC’) you have to prove that after paying your monthly living expenses, you do not have any money left to pay ANYTHING towards your tax debt. You can call the IRS directly and speak with an agent who can take you through the approval process right over the phone. Be prepared to answer questions regarding your current income (have a couple of paystubs on hand) and expenses (you may want to have these already jotted down in front of you). Once you are approved by the IRS you will be placed in CNC Status until your financial situation changes for the better. While you are in this status you literally pay NOTHING to the IRS. However, it may be in your interest to pay a little something every month (or every other month) as penalties and interest will continue to be charged (and these can really rack up!).
Now here is where things get interesting: As mentioned under tool #3, the IRS only has 10 years to collect a tax debt. Using the previous example in tool #3 of owing $20,000 (which is already 3 years old), let’s say you qualify for CNC status and cannot afford to make any payments towards your debt – and every year for the next 7 years you prove to the IRS that your financial situation has not changed and you simply can’t afford to pay….guess what happens at the end of that 7 years? Yep, the full $20,000 rolls off! Disappears! Poof-GONE! See how it can be a real gem?
Tool #5: Innocent/Injured Spouse Relief
If you filed a joint return with your spouse (or ex-spouse) only to find out that they left out quite a bit of income, or took some credit/deductions that they weren’t entitled to (without your knowledge) and the IRS is holding YOU responsible for the resulting debt, you may be able to qualify for relief using this tool. You will have to fill out form 8857 and submit to the IRS. After the IRS takes in all the facts regarding what led to the tax debt, they may determine that it would be unfair to hold you liable for the debt.
Tool #6: Offer In Compromise (this is the granddaddy of all tools! But not everyone qualifies)
By now I know you have heard the commercials on the radio asking ‘do you owe the IRS $10,000 or more?’…or how about the ‘we can help you settle for pennies on the dollar!’. These ads are primarily referring to a well know tax resolution tool called the Offer In Compromise (OIC, for short). People ask me all the time: can you really settle your tax debt with the IRS, and pay less than what you owe? In short, yes, you can. However, very few taxpayers actually qualify for this tool – and it’s a fairly long and rigorous application process (the radio ads conveniently leave out this part).
There are indeed cases where a taxpayer owes more than what they can pay over a reasonable time period. By reasonable time period, I’m referring to the remaining time that the IRS can legally collect. If your net monthly cash flow (cash you have left after you have paid all your bills and covered your living expenses) is insufficient to pay off your tax bill over the remaining period to collect, and you have little to no assets, you MAY be a prime candidate for an OIC. There are 3 types of OIC’s:
1. Doubt as to Collectability – the inability to pay
2. Doubt as to Liability – you don’t actually owe the tax
3. Effective Tax Administration – it’s in the best interest of the government not to pursue you
This post will focus only on Doubt as to Collectability. This is not a tool that I recommend you use or try on your own. Sure, you could put together your own package and submit it to the IRS…you also could do your own oil changes or fix the faulty electrical wiring in your house – but should you?
For starters, you will need to gather all of your current documents related to your income, expenses, assets, and liabilities. These items will be vital to completing the required forms, which includes the Collection Statement (Form 433-OIC) and the OIC application (Form 656-OIC). Complete both forms in their entirety and make sure to sign and date. Typically, you will need to provide 3 months worth of statements/bills for each living expense you list (utilities, phone, rent, mortgage, car note, insurance, etc). income will need to be documented by current paystubs. There is a complete checklist on the actual application (form 656-OIC) for the items you will need to include in your package. IMPORTANT: your Form 656-OIC should include the amount of your offer. You also have 2 choices of how you want to pay off your offer:
1. Lump Sum – requires you to pay a 20% initial payment with your offer. If the offer is accepted, you can pay the balance over 5 months or less.
2. Periodic Payment – you have 24 months to payoff your offer if accepted. You must include your 1st payment with your application package.
Once you have assembled your package, you will mail it in to the OIC dept (make sure to send certified mail so that you can track and confirm receipt!). Within 10 – 20 days you should receive a letter from the IRS acknowledging the receipt of your package. Not too bad, right? Well, here’s the kicker…it can take anywhere from 6 months to over 12 months for your request to be processed and approved/rejected! Make sure that you respond to any requests for additional information IMMEDIATELY! If your offer is rejected for lack of information, non-compliance or missed payments, you will have to go to the back of the line and start all over again. Not fun. There’s a lot more to know about the OIC – call a professional tax resolution specialist for help with this one!!!!!
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