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IRS Tax Debt Settlement: What You Need To Know

IRS Tax Debt Settlement: What You Need To Know

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If you’ve found yourself in IRS tax debt, don’t worry — taxpayers have a variety of options for getting an IRS tax debt settlement. They can make a request for a monthly payment plan or fulfill an offer in compromise. There is also the option of seeking bankruptcy protection but we’re here to help you find the best option for you. 

Here is what everyone needs to know about a tax debt settlement. 

Here Are Your IRS Tax Debt Settlement Options

Here we will give options for resolving IRS tax debt and deciding the right one depends on the severity of your situation. You can set up an installment agreement or set up a partial payment installment. There’s the option to submit an offer in compromise, file for bankruptcy, or declare not currently collectible by the IRS. 

Having an Enrolled Agent assigned to your case is a good idea. Your representative will typically prepare a financial statement for you based on a series of questions designed to determine your particular financial situation such as which tax debt strategies will resolve the issue most efficiently.

However, everything will depend on your personal financial situation and your ability to pay based on a set of IRS mandated standards. It’s important to be honest. Also keep in mind that if the IRS determines that you not being honest, or are spending a lot of money on things that they don’t allow, they will suggest that you set up a payment plan. In extreme cases, your Tax Professional may suggest that you consult an attorney about whether you should file for bankruptcy instead.

How to Determine a Successful Offer in Compromise

While figuring out a tax settlement with the IRS, you could be given the option to pay something as well as to borrow. However, the IRS won’t approve any option other than to pay the debt in full, if you are not currently in compliance with the tax laws. For example, you must be current on your estimated tax payments or federal income tax withholdings.  If you are an employer, you must also have filed all of your employer tax returns and be making your payroll tax deposits on time.

Choosing the Best Tax Debt Strategy 

Typically, the IRS would prefer that you decide on tax debt settlement which involves paying in full or initiating an installment agreement.  You must qualify financially to initiate an Offer in Compromise or be declared as a Non-Collectable status. Offers in Compromise and installment agreements are contracts between you and the IRS, and as long as the terms of these contracts are being fulfilled, you won’t be bothered again by the IRS about those debts. However, the IRS does reserve the right to contact you if you slip up again down the road.

More About Partial Payment Installment Agreements

A partial payment installment agreement is when you make monthly payments, but you pay less than the full amount owed. These contracts are easier to get than offers in compromise. However, unlike a full-pay installment or an offer agreement, the IRS is free to re-evaluate the terms of a partial payment installment contact every two years. 

If the IRS believes that you can afford to make larger payments, the partial payment installment agreement may be renegotiated. You can request reevaluation at any time should your circumstances change. Especially if it is to a degree that the amount you and the IRS agreed upon can no longer be made. 

You can submit a written request for a partial payment installment agreement for your IRS tax debt settlement to the IRS Revenue Officer who has been assigned to your case, or to the Automated Collection System unit if there isn’t a Revenue Officer already assigned, on or the other will handle your account.

What Happens If You Have Little to No Documentation

The IRS is expecting you to submit as much documentation to support your tax debt settlement request. If you don’t keep your bank statements and paystubs, the IRS officer will try their best based on the information you can provide. In some cases, however, the IRS may accept written projections of your income when there’s little to no documentation. 

Paying in Full v. Making Monthly Payments

When handling IRS tax debt, it’s recommended to make a cash offer to pay within 90 days of notice that your offer in compromise has been accepted. Cash offers are sometimes offered faster than any other arrangement. Also, the IRS assumes there will be less of a chance that you might default on the payment arrangement. 

Your offer amount is calculated by the reasonable collection potential. This includes the sum of monthly disposable income over the next 48 or 60 months. If you have a cash offer, then the IRS multiplies any disposable income over 48 months. 

On the flip side, if you have a 24-month payment offer, the IRS will multiply any disposable income over 60 months. So, you are typically better off with a cash offer if you can pay within a shorter time period. Otherwise, you are better with the higher 24-month offer because you would still have a contract that can be counted on as long as the terms are honored. 

Hiring a Tax Professional v. Doing It Yourself

Generally, you should hire a tax professional who has experience with handling debt settlement. But if you owe less than $10,000 in taxes, you can probably handle everything by yourself simply by calling the IRS and requesting a payment plan. If you owe between $10,000 and $25,000 (or more), you should consult with an experienced tax professional about your options. 

If the latter is the case, you should seek a professional with extensive tax knowledge, particularly concerning a tax settlement. The more complex your case is, the more professional help may cost you. For example, an offer of compromise will typically cost a minimum of $2,500.

Get Started on Your Taxes Today

There are advantages and disadvantages of these IRS tax debt settlement options. Speaking to either a tax professional or the IRS directly is your best option before handling an IRS tax debt yourself. Reach out to one of our agents and see which option is best for you!

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