For the average taxpayer, especially the self-employed, a sudden or significant shift in circumstances can inflict severe financial hardship. Tax liabilities constitute one of the main debts with which financially-struggling individuals must grapple. It is, therefore, of paramount importance that consumers curtail IRS tax debt at its inception by finding a way to make payments, for instance, by selecting a payment plan that best suits their situation. Taxpayers bogged down by an outstanding amount of debt have numerous tax debt management options available to them:
1. Extension For Paying Taxes
Taxpayers may request, in advance of the April 15th filing date, an extension for a maximum duration of 120 days.
2. Double-Check Of Their Deduction Claims
To reduce their tax liability, taxpayers should ensure that they have claimed every deduction to which they are legally entitled. Individuals who have already filed their taxes are well-advised to review their original tax returns to determine whether any deductions were omitted. If there are more deductions to be claimed, taxpayers should amend their returns in order to lower the amount owed.
3. Offer In Compromise
One mechanism for
tax debt relief is the offer in compromise, which enables taxpayers to settle their debt by paying the reasonable collection potential. Participating debtors enter into an agreement with the IRS to pay only a reasonable amount, rather than the full amount of the sum owed. Oftentimes, this method of tax reduction generates savings that exceed 90 percent. To pay off part of the amount due in return for forgiveness of the balance owed, taxpayers may choose to enter into a short-term payment plan or to make a lump sum payment. Taxpayers should carefully manage their monthly budget, since it can make or break an offer in compromise. The offer's success will frequently hinge upon small adjustments to the applicants' budget. It is therefore imperative that taxpayers document their expenses in a comprehensive and meticulous manner and engage in persuasive negotiation with the IRS so that more expenses are incorporated into the necessary living expense category.
4. Installment Agreement
This form of tax debt settlement allows taxpayers to set up a monthly installment plan to pay off their debts. This option is ideal for individuals whose total tax debt is less than $10,000.
5. Penalty Abatement
The IRS imposes late fees and penalties to the amount owed by taxpayers when the latter fail to pay their taxes timely and in full. Fortunately, taxpayers can request penalty abatement, whereby the IRS will partially or completely remove the penalty fees they have incurred. Pursuant to IRS guidelines, a penalty abatement is typically granted "when the taxpayer exercises ordinary business care and prudence” in trying to repay his or her tax debt. The IRS is very flexible on what constitutes reasonable cause. Some of the extenuating circumstances that meet the reasonable cause standard and thus qualify for removal of the penalties include the following:
- Death of a family member
- Natural disasters
- Lengthy unemployment period
- Stolen or lost records
- Bad accounting
Since penalties comprise such an important percentage of the total tax debt, taxpayers can gain substantial tax savings when the IRS reduces their penalties to zero.
Finally, taxpayers seeking to protect themselves from further action by the IRS will find a host of
tax services at their disposal. Tax professionals well-versed in tax debt resolution or settlement can assist debtors in a number of ways, including the following:
- Ensuring the accuracy of their client's original tax return
- Verifying whether any deductions were overlooked
- Determining whether their client can afford the monthly payment amount
- Negotiating with the IRS on behalf of their client (i.e., monthly payment plan)
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