Settling IRS and State Back Taxes
Every year there are hundreds of thousands of people that are having problems with back taxes, so you can be assured that there are many ways to resolve these problems depending on your unique situation.
When it comes to unpaid taxes, the IRS and States can implement many different forms of collection mechanisms to make your finances a complete mess. The IRS does give warning before any types of actions are taken, typically it starts off with a few letters that assess you with penalties and interest that threaten action.
This lense will guide you through the different methods available to tax payers. Since there are literally hundreds of thousands of people each year that can't pay their tax on time you can be assured that the IRS has created a method for every single person to settle their back taxes no matter how bad their financial situation is.
The order of these methods go from what people should do with a great financial standing to people who are completely and absolutely broke. Just know, even if you can't pay, you can settle your back taxes. The sooner you settle the better because the IRS will keep assessing penalties and interest as long as they are not settled.
When it comes to unpaid taxes, the IRS and States can implement many different forms of collection mechanisms to make your finances a complete mess. The IRS does give warning before any types of actions are taken, typically it starts off with a few letters that assess you with penalties and interest that threaten action.
This lense will guide you through the different methods available to tax payers. Since there are literally hundreds of thousands of people each year that can't pay their tax on time you can be assured that the IRS has created a method for every single person to settle their back taxes no matter how bad their financial situation is.
The order of these methods go from what people should do with a great financial standing to people who are completely and absolutely broke. Just know, even if you can't pay, you can settle your back taxes. The sooner you settle the better because the IRS will keep assessing penalties and interest as long as they are not settled.
Settle Back Taxes by Paying amount owed in Full
This is the most obvious method of settling back taxes. Once you pay off all tax amounts owed, plus interest and penalties, you will be on good standing with the IRS and they will take no further actions against you for the take year/years that you paid off.
If you do not have the full amount of money to pay off the balance owed you can always consider a loan, home equity loan, borrow from friends and family or sell some assets.
Home Equity Loan
If you own a home and have owned it for several years and have some equity built up (home value - mortgage value) you can borrow against that equity amount at the current mortgage rate. If you do this, you can pay off the taxes with the amount received from the additional money taken out on the loan and you will be paying off that amount over time at a low interest rate.
Borrow from Friends and Family
If you know you can borrow from friends and family make sure you know you will be able to pay them back soon, because if you can't, there are better ways to settle your back taxes with the IRS. There is no reason to pass the burden of money owed from the IRS to family and friends because the IRS will think no better or less of you if you choose to settle a different way.
Sell Assets
Selling assets can be a good choice if you have items that you no longer need, like that old classic car in your garage that is just collecting dust and you have lost interest in that old hobby of yours. Paying the amount in full without a loan can be great because you will end up paying less in the long run because you will not have additional interest payments.
If you do not have the full amount of money to pay off the balance owed you can always consider a loan, home equity loan, borrow from friends and family or sell some assets.
Home Equity Loan
If you own a home and have owned it for several years and have some equity built up (home value - mortgage value) you can borrow against that equity amount at the current mortgage rate. If you do this, you can pay off the taxes with the amount received from the additional money taken out on the loan and you will be paying off that amount over time at a low interest rate.
Borrow from Friends and Family
If you know you can borrow from friends and family make sure you know you will be able to pay them back soon, because if you can't, there are better ways to settle your back taxes with the IRS. There is no reason to pass the burden of money owed from the IRS to family and friends because the IRS will think no better or less of you if you choose to settle a different way.
Sell Assets
Selling assets can be a good choice if you have items that you no longer need, like that old classic car in your garage that is just collecting dust and you have lost interest in that old hobby of yours. Paying the amount in full without a loan can be great because you will end up paying less in the long run because you will not have additional interest payments.
Settle Back Taxes with an Installment Agreement
An installment agreement is the most common method of settling back taxes with the IRS and states. This method is typically the easiest form of settlement to obtain.
With an installment agreement you set up a monthly payment plan with the IRS that you agree to make. These amounts add up to more than the original amount owed because you have to pay interest on the outstanding amounts and you need to payback any penalties you may have incurred prior to setting up the installment agreement.
Typically with an installment agreement you will have about 3 years at the most to pay off the tax amount owed. If you cannot afford the monthly payments spread out over a 3 year period then this option is not for you.
There are two ways you can apply for an installment agreement with the IRS. The first way is you can go online and go to the IRS site and use the online payment agreement application to apply. Second, you can fill out IRS Form 9465 and mail into the IRS and wait for a response.
Using an installment agreement is a good choice if cannot pay off the tax amount in full and you know you can handle the minimum monthly payments required with the installment agreement.
With an installment agreement you set up a monthly payment plan with the IRS that you agree to make. These amounts add up to more than the original amount owed because you have to pay interest on the outstanding amounts and you need to payback any penalties you may have incurred prior to setting up the installment agreement.
Typically with an installment agreement you will have about 3 years at the most to pay off the tax amount owed. If you cannot afford the monthly payments spread out over a 3 year period then this option is not for you.
There are two ways you can apply for an installment agreement with the IRS. The first way is you can go online and go to the IRS site and use the online payment agreement application to apply. Second, you can fill out IRS Form 9465 and mail into the IRS and wait for a response.
Using an installment agreement is a good choice if cannot pay off the tax amount in full and you know you can handle the minimum monthly payments required with the installment agreement.
Settle Back Taxes with an Offer in Compromise
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the total amount originally owed.
The way the offer in compromise agreement works is that the IRS and the tax payer come to an agreement of a settlement price so they can then call it even. The IRS will accept an offer if they feel that the offer is equal to or greater than the amount they can forcefully collect from you less the cost of doing the collecting. So in other words, you have to prove to the IRS that you are poor and you cannot come up with the money you owe them and if you do it will cause you financial hardship. You then have to make them an offer that is equal to or greater they would ever expect to collect from you.
The IRS is highly unlikely to accept this type of agreement if it believes that it can eventually collect more money than the amount offered. This is not an easy agreement to get accepted, a lot of work goes into figuring out the right amount to offer the IRS and the taxpayer must meet a set of strict requirements set by the IRS to qualify.
Below are the brief requirements to qualify for an offer in compromise as stated by the IRS:
If you feel you qualify for this type of relief, it is best to use a tax professional to help you with this type of filing. The paper work is very tedious and the majority of these requests are rejected by the IRS, so it is good to have someone who has done many of them before and knows exactly what is required for an individual to qualify.
The way the offer in compromise agreement works is that the IRS and the tax payer come to an agreement of a settlement price so they can then call it even. The IRS will accept an offer if they feel that the offer is equal to or greater than the amount they can forcefully collect from you less the cost of doing the collecting. So in other words, you have to prove to the IRS that you are poor and you cannot come up with the money you owe them and if you do it will cause you financial hardship. You then have to make them an offer that is equal to or greater they would ever expect to collect from you.
The IRS is highly unlikely to accept this type of agreement if it believes that it can eventually collect more money than the amount offered. This is not an easy agreement to get accepted, a lot of work goes into figuring out the right amount to offer the IRS and the taxpayer must meet a set of strict requirements set by the IRS to qualify.
Below are the brief requirements to qualify for an offer in compromise as stated by the IRS:
- Doubt as to liability - You are able to show that there is doubt that the tax amount assessed is incorrect.
- Doubt as to collectibility - This is the most common method used when people file for an offer in compromise. The person must show that it is highly unlikely that the tax amount owed will ever be paid in full.
- Effective Tax Administration - With this type, the debtor does not deny that the tax is correct and could be collected, but if it were collected it would be unfair or inequitable because it would create financial hardship. Typically when an offer in compromise is granted under this requirement it is the disabled and elderly.
If you feel you qualify for this type of relief, it is best to use a tax professional to help you with this type of filing. The paper work is very tedious and the majority of these requests are rejected by the IRS, so it is good to have someone who has done many of them before and knows exactly what is required for an individual to qualify.
Useful Tax Debt Help Sites and Articles
- Back Taxes Help
- Experts in IRS and State Tax issues. Help settling IRS and State tax debts for people in all different financial situations.
- Obama to increase funding on going after people that owe taxes
- Obama administration to increase funding on catching tax evaders. If you thought you would squeak by the IRS before, won't happen again.
Comments
backtaxes wrote...
Great post on settling back taxes. Other options to settle are partial payment installment agreement and penalty abatement. People don't realize all the different options out there for resolving their problems. They just need to do their research to find the best method that will work for their unique financial situation. Sometimes a basic installment agreement works best but then sometimes an individual can actually settle for less than they owe. Here is some more information on different settlement methods, including the ones I mentioned above.
Posted June 23, 2009
