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Written by AskTheLawyers.com™
Tax season can be stressful, especially if you unexpectedly owe back taxes. If you or someone you know owes the U.S. Internal Revenue Service (IRS) money in back taxes, there are different options to consider. This article will cover some of the most common options for back taxes defense, along with their advantages and disadvantages.
Entering into an installment agreement can be beneficial for many reasons. For one, entering into the agreement allows the payee to be considered as “compliant” with the IRS. Being labeled as compliant means that the person who has the outstanding debt is willing to cooperate with the IRS in the long term. This also reduces the amount of contact the IRS attempts to collect. Payees will experience less phone calls and letters in the mail. Other benefits stemming from this option include keeping the IRS content; it prevents the IRS from making additional actions toward collection; it is a flexible option; and finally, it is an option that is almost always available.
An installment agreement may be the best option for many people, but it is not for everyone. An example of this is when a taxpayer owes a substantive amount in back taxes yet can only afford minimum payments. This would mean that what is being paid only accounts for paying off the principal amount in the debt. Even with this disadvantage, entering into an installment agreement should always be considered as an option, even if it is as a temporary solution. Another disadvantage that payees may encounter is the accumulation of the debt’s interest, which could quickly amount to years worth of debt. Taxpayers should also be consistent with their payments—otherwise they enter into default. This, however, is not necessarily a disadvantage if the payee chooses to enroll in automatic payments.
Another method to use when attempting to reduce the amount of tax owed is filing a return past the due date (if one was never filed) or filing an amended return. Often times, payees could reduce their responsibility by amending the return if there was an overstated liability in the original return. Comparably, when failing to file a return, the IRS could file a substitute for the return. This, however, will give the taxpayer minimal deductions and minimal exemptions.
Always consider filing an amended return since it has the potential to reduce the taxpayer’s liability. It could be the best option if the taxpayer has failed to file his or her return and the IRS has in turn filed a substitute for the return. It can also be the best option for Schedule-C filers.
However, this is one of the more complex options since it requires the knowledge and understanding of the federal tax code. Payees also need to keep the statute of limitations in mind.
The alternative known as Option in Compromise is very popular among taxpayers who have an outstanding debt with the IRS. Unfortunately, this option is not available for everyone.
An Offer in Compromise lets a taxpayer settle his or her debt for less than the amount that is owed. It could be an authentic option if the payee is unable to pay the tax liability in full or will otherwise create a financial difficulty for him or her. The following is a list of the taxpayer's conditions that are considered when applying for an Offer in Compromise:
It is important to keep in mind that this program is not for everyone. When hiring a professional to assist in the application process, it is also important to check his or her credentials.
Offer in Compromise offers many benefits for those who qualify. In order to apply for the program, taxpayers must be in good standing with all payment requirements. Further, taxpayers who have an open bankruptcy proceeding will automatically not qualify for the Offer in Compromise program. Taxpayers who qualify for the program must make a substantive initial payment. He or she must also remain in compliance of the program’s conditions throughout the duration of the program.
If a taxpayer’s application is rejected, he or she will be able to able to appeal that decision within 30 days of the rejection. There are tools available on the IRS website which can help individuals through the appeals process.
Unbeknownst to many taxpayers, the IRS has a limited time to collect back taxes. The IRS has ten (10) years to file a claim or they will otherwise lose their ability to do so. There are many consequences taxpayers should be aware of, however, when choosing not to pay back taxes. The IRS has the ability to liquidate a person’s assets and garner other forms of funds, which include wages. There are also many exceptions to this collection statute expiration which can include, but are not limited to, a person’s filing for the Offer in Compromise program and filing for bankruptcy.
If you or someone you know owes the IRS in back taxes, consider speaking to a qualified tax law attorney who can guide you through the options available. An experienced attorney can identify the best option for your circumstances.