For Americans of all walks of life, tax debt is the object of as much apprehension as the grim reaper. The specter of bankruptcy haunts vulnerable individuals and families caught in the vicious circle of local, state and/or federal tax debt. However, contrary to what the average taxpayer thinks, it is not the end of the world. A remedial measure known as tax debt settlement helps taxpayers recover their financial equilibrium and avoid the last resort of bankruptcy. The amount of savings that tax debt relief options are capable of generating is case-specific.
To reduce tax debt and steer clear of bankruptcy, consumers have a number of tax debt settlement options at their disposal:
1. Offer In Compromise
This program allows taxpayers to settle their tax debt for a lower amount than what they owe. Once an applicant files an Offer in Compromise, the Internal Revenue Service (IRS) may, at its discretion, accept less than the full amount of the debt if 1) it is unsure as to whether the applicant is in fact responsible for the tax debt or 2) doubt exists as to whether it is feasible to collect the full amount of the debt. A taxpayer's principal, penalties and interest are reduced upon the IRS' acceptance of the offer in compromise. The IRS will require taxpayers to enter into a short-term, monthly payment plan or make a lump sum payment to settle its debt for a lower dollar amount.
2. Monthly Payment Plan
There are two types of IRS monthly payment plans: (1) Installment agreements and (2) Partial payment installment agreements. Taxpayers can set up an installment agreement, which offers reduced penalties and involves paying the IRS a specific amount each month. The steps are as follows:
- Taxpayers must find out how much they owe in back taxes
- They must select a day of the month for their installment payments
- They must then decide the amount they are willing to pay each month. This becomes the minimum amount they will be required to pay each month
- In approximately 30 days, the IRS issues a response to their request
To be eligible for automatic approval by the IRS of an installment agreement, applicants' tax debt must not exceed $10,000, and their monthly installments must pay off the entire amount owed within three years.
A relatively new program for tax debt relief is the partial payment installment agreement, whereby taxpayers enter into a long-term monthly payment plan with the IRS at a reduced dollar figure. The payments submitted by the taxpayer do not settle the tax debt in full. Once the terms of the partial payment installment agreement are satisfied, the remaining balance is forgiven. As with the installment agreement, a petitioner sends a letter to the IRS requesting a partial payment installment agreement and the IRS typically issues a response within 30 days. At any time following approval, taxpayers whose situation has altered to such an extent that they are unable to meet the agreed-upon monthly amount, may request re-evaluation.
3. Not Currently Collectible
Pursuant to this form of tax debt settlement, the IRS receives evidence and concludes that a taxpayer lacks the ability to pay off his or her tax debt. Thereafter, it halts all collection efforts, such as garnishments and levies for a year or so. If the IRS cannot obtain payment of the tax during the 10-year statutory period, the not currently collectible individual's tax debt is extinguished.
In light of the fact that tax debt settlement is a complex process requiring a certain level of expertise, IRS tax help is a valuable asset. Qualified tax service professionals facilitate the procedure and enable their taxpayer-clients to reduce their tax burden and resume worry-free their daily activities and/or business operations.
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