Best 5 Methods to Settle Back Taxes
When it comes to settling tax debts there are 5 common solutions. It is best that you learn all available options and see what fits your particular situation the best before taking action. Some important things to consider prior to making your decision of what tax debt settlement method to use are your back tax amount owed, tax debt amount, the maximum amount you can afford to pay, the amount of assets you have, and if you would be able to pay amount in full if you just had more time. Below are the 5 most common ways to settling back taxes.
Offer in Compromise
An offer in compromise is the method that allows individuals to settle IRS back taxes for less than the total amount originally owed. If you have ever heard the saying, “Settle for Pennies on the Dollar”, this is the way that is used. It shouldn’t come to a surprise that this is the hardest settlement method for IRS back taxes. The IRS has strict requirements to qualify for an offer in compromise. The offer in compromise tries to find what amount would work best for both the IRS and for the individual. This means the IRS will only settle for less if you can prove it will cost them more to try to get the money from you. This is a good choice if your total assets is less than the amount of tax debt you owe.
Installment Agreement
An installment agreement is the most common method for individuals to settle their back taxes. You will be required to make monthly installment payments of a minimum amount. With an installment agreement you will end up paying more than the original amount owed because you will still have to make interest payments. An installment agreement should be used if you cannot pay of entire amount owed in full but have the means to pay off over time.
Delay the IRS
If you simply need more time to pay the total amount due it can easily by done by using your understanding of the IRS system to your advantage. When taxes are unpaid it begins the IRS automated notice system. The IRS send a series of automated letters before it begins collections. Typically the IRS sends an original assessment letter stating the amount of tax owed plus any interest and penalties then it will send a series of four CP Letters (Computer notice noted by number on top of letter). Know that you have about 3-6 months before IRS takes action if nothing is done, but you will receive interest and penalties on outstanding amounts. To get more time all you have to do is compose a letter back to the IRS in response to the assessment notice or CP notices and mention that you cannot pay at the current time and say you would like a 45 day extension. When 45 days is up and you can’t pay, just do it again. Just know that once you receive IRS notice CP-504, you will not have much more time until they take collection actions against you.
Currently Not Collectible
This method doesn’t really resolve your taxes owed, but it put off collections. When you receive this status, the IRS will pause collections until you can pay. One thing to keep in mind here is that the statute of limitations is still running and the IRS has 10 years to collect back taxes from the year they were filed. If 10 years passes and they have not collected, you no longer owe that amount.
Tax Professional (Tax Attorney or CPA
Tax specialists are many times the the most efficient way to settle tax debts. Tax experts have the highest success rate for getting offer in compromises accepted and for the least amount of money. Tax experts are great at setting up the most affordable payment plans with the IRS. Most tax professionals will offer a free consultation to give you your options, likely outcomes, and cost. It is best to talk to multiple tax professionals to find the one that you feel gives the best suggestions, you get along with best, and gives you a reasonable price.
Every year thousands of people settle their unpaid back taxes with the IRS. Tax code continues to get more and more complex that even the highest ranking IRS individuals don’t even understand it. Knowing your options and taking action early is the best thing to do when dealing with a tax situation.
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