There are many ways for people to fall behind on their income tax obligations. Perhaps they work as a self-employed professional and suddenly lost their main contract. They may have been unable to make estimated quarterly tax payments.
Perhaps they attempted to use tax preparation software but made mistakes that resulted in a substantial underpayment of federal income taxes. They may even have repeated the same mistake for multiple years in a row. By the time the Internal Revenue Service (IRS) notifies the taxpayer of a significant tax debt, it may have grown quite large.
The IRS assesses penalties and also charges interest on the amount someone owes. Taxpayers reeling from the discovery that they owe thousands of dollars to the federal government may feel panicked because they cannot cover that full amount immediately. Thankfully, there is a way to address tax debts when paying the full amount isn’t a realistic solution.
The IRS accepts offers in compromise
A taxpayer shocked by what they owe to the IRS can potentially propose a settlement offer. An offer in compromise might entail making a lump-sum payment for a significant portion of the total amount of income taxes due. Other times, offers in compromise involve a regular payment plan with a series of monthly payments.
In both scenarios, it is possible to negotiate arrangements in which the IRS accepts less than the full amount due. However, the IRS does expect a taxpayer to make a reasonable attempt to pay as much as they can given their income and the amount of taxes they currently owe.
Carefully reviewing household finances and the estimated tax debt can help taxpayers begin planning an offer in compromise. Frequently, they may need legal assistance to understand IRS requirements and craft an offer that is likely to receive approval. There may be a period of negotiations before the establishment of the final arrangement.
Most people benefit from having assistance during this process, as they may find direct communication with the IRS to be relatively stressful. Proper support allows the taxpayer to focus on their career and their family while a professional handles IRS negotiations.
Once the IRS accepts an offer in compromise, the taxpayer needs to follow through on their financial promises. They may need to rework their budget to accommodate monthly payments or liquidate assets to fulfill a lump-sum payment arrangement.
Making a good faith effort to handle tax debts can help a taxpayer avoid prosecution and may limit the penalties and interest they ultimately pay on their tax debts. Reviewing current tax obligations can help those who may need to prepare an offer in compromise to resolve outstanding income tax debt. A successful offer in compromise can eliminate tax debt and help someone regain good standing with the IRS.