Tax Relief Options
All of the tax relief options offered by the IRS to “fix” your tax problems require you to be in compliance. Compliance requires 2 things.
- You have to have the last 6 years worth of tax returns filed with the IRS. This includes personal income tax, trust tax, business income tax and payroll tax returns.
- You have to have your current year taxes paid to date. If you are an employee, you must have enough tax withheld so that when you file your next year’s return you will not owe any money. If you are self employed, you must have made estimated tax payments thru whatever quarter you are submitting your paperwork to the IRS to solve your issues. And if you have employees, you must have paid all of the payroll taxes due.
Offer in Compromise
An Offer in Compromise (OIC) is the tax relief that everyone seems to read about. Per the internal revenue manual, “An offer in compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.” What you don’t read about is that not everyone qualifies for an OIC. Only about 42% of those taxpayers who qualify for an OIC are accepted.
The rules for an OIC are:
- You have to qualify, which means you probably do not have any equity in real estate. Your retirement accounts and/or pensions will also be used to calculate the offer. If you have significant dollars in either of these assets you probably will not qualify for an offer. The IRS calls this your Reasonable Collection Potential. The RCP can be calculated by formula, but creative planning can reduce the calculation and make all of the options less of a burden on you.
- You must have all tax returns filed. This means all return for the last 6 years must be filed or sent in with the Offer workpapers.
- When the offer is submitted, you must make a 20% payment of the amount being offered. The remaining balance will be due over five months if your offer is accepted.
- You must be in compliance for 5 years after the OIC is accepted. If you are self employed, this means making timely accurate estimated tax payments. Once you get tax relief from the IRS, you must file your tax returns timely.
Currently Not Collectible
Currently not collectible is a status the IRS assigns to taxpayers who have little to no assets, and for whatever reason are not able to work. Taxpayers have to qualify for this status every year to 18 months. This status stops collection activities and no payment is required to IRS. If the taxpayer can stay in this status until the statute of limitations has lapsed, then total tax relief is obtained.
There are 2 types of installment agreements. Full payment and partial payment.
Full Payment Intstallment Agreement
If you are reading our website, it is safe to assume that you are not financially able to pay the IRS in full and are looking for relief from your taxes. This is the option that the IRS and/or state would prefer you choose, but if you have had outstanding taxes owed for some time you may owe more in penalties and interest than you owe in tax.
Partial Payment Installment Agreement
A partial payment installment agreement is used when you are not able to pay the entire balance owed including accruing interest and penalties before the statute of limitations expires. The amount of your payment is determined by the amount the IRS/state agency believes you can pay each month. However, once the statute of limitations expires you are no longer obligated to make further payments. This can be a good strategy for both the government and the taxpayer. The government collects as much as they can for the time period allowed, and the taxpayer pays less than the amount owed.
Collection Due Process Hearing
Only about 3% of taxpayers who receive Notice of Federal Tax Lien or a 504 Letter file the required paperwork to take their case to Appeals if a satisfactory settlement can’t be made with the revenue officer handling their case. Filing notice of intent to take your case to a Collection Due Process hearing, also give you the right to take your case to tax court if you believe an error in interpreting the tax law was made by the appeals officer.
That’s why it’s so important to open the envelopes you receive from the IRS and read the contents. As a taxpayer, you have rights but you have to exercise those rights in a timely matter. In the case of filing the paperwork for a collection due process hearing, it has to be done within 30 days or you lose your chance to go to tax court. If you don’t file the paper work within 1 year, you lose your right to take your case to appeals.
Most of the CDP hearings are done by telephone. You can request a face to face meeting but the IRS is moving toward Zoom meetings.
Bankruptcy may also be an effective tax relief option. Several criteria must be met. If you choose to file bankruptcy we will refer you to a tax attorney.