Taxes remain one of the biggest certainties of our lives and yet, each year, there are a large number of people who owe to the Internal Revenue Service (IRS). Despite knowing that we are liable to pay taxes on our income annually, many do not understand the maxim. If you fall behind the income tax payment, you could be in a difficult situation. It is easy for the government to hit you with a bill and you will have no way to escape. The longer you delay, the worse your consequences.
However, the IRS does come to a deal with those taxpayers who can show that they did not pay the taxes as they didn’t have money. They weren’t cheating on the government. If you want to settle the tax debt but are genuinely strapped and cannot pay what you owe, there are options you can consider. Learn all about the options and then choose the best strategy for you. One thing to remember is that the attempt will not always be successful and everyone is not eligible to try.
How does a tax settlement work?
Tax settlement is a form of negotiation where the dispute between the IRS and the taxpayer is resolved and the outstanding amount of debt is reduced. You can create a payment plan to meet the obligations over time. The IRS wants its money but when you can convince them that you do not have enough to pay the entire amount, they understand that something is better than nothing.
An expert for tax audit Services from CST-CPA states, “The biggest benefit to a successful tax settlement is that you pay less than what you owe. It will avoid a tax lien and will keep the IRS from wage garnishment. If you can avoid these two things, you are already in a much better position and can protect your credit score.” In case you are unable to pay the government what you owe, the best alternative is a tax settlement.
Eligibility for tax settlement
When you opt for a tax settlement, you have to convince the IRS that you have already tried everything possible to meet your obligations and yet failed. You could also prove that the reason you failed is because of the circumstances that were outside your control. If you can do this, there is a chance that the IRS will be convinced and will work with you. To determine your eligibility, the IRS will examine your assets and income against your expenses. This will help establish your financial state. It will then decide how much you could pay monthly towards the tax bill. If the amount is less than the outstanding liability, you have opportunities for a settlement. However, if you already have a bankruptcy filing pending, you will not be eligible for a tax settlement.
Ways to settle the IRS debt
Here are the basic ways you can handle the outstanding tax liability with the IRS.
Installment plans
An installment plan works like a home mortgage where instead of paying the lender, you pay the IRS monthly. It is an agreement you enter into with the IRS but qualifying for a plan is not easy. If the arrears are over $50,000, then the IRS will not deal with you. However, if you have filed past tax returns and meet the debt criteria, the IRS could arrive at a monthly payment.
Offer in Compromise
The IRS could consider a settlement where you can pay a reduced amount of what you owe in taxes. Known as an offer in compromise, you will have to convince the IRS that you cannot afford to pay the amount you owe and instead, offer to pay a reduced amount in instalments or a lump sum. You can file a form proposing a compromise and pay a filing fee. It will require you to share all the information about your income, spending, assets, and the equity you have in your investments. The IRS will consider your sources of credit and net worth before deciding. That said, you cannot apply for a compromise if you already have an open bankruptcy filing.
Innocent Spouse program
If you file a joint tax return with your partner, you will be responsible for underpayment. However, there is relief for separated and married couples if the spouse hides the tax liability from the other. Whenever a partner can show that the other has not reported income or has reported income inappropriately, the one who was misled will be able to seek relief from their tax liability. However, to qualify for the relief, it is important to show that the spouse has misled you by not reporting the income or taking credits that they weren’t liable for.
It is advisable to seek help from a professional to choose the right strategy.
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