Whether due to major life changes such as job loss or medical emergencies or the result of unexpected expenses that strain finances, taxpayers can find themselves falling behind on their tax payments for any number of reasons. Taxpayers who find themselves facing large tax bills have options. Two options that work directly with the Internal Revenue Service (IRS) to address the debt include offers in compromise and installment agreements.
#1: Offers in compromise
An offer in compromise (OIC) is much like the name implies. It is an offer, made by the taxpayer to the IRS, to pay off the tax debt for a smaller amount than actually owed. This compromise is meant to benefit both parties. The taxpayer gets to pay off their debt for a smaller amount while the IRS gets at least a portion of the money that it is due. The IRS considers various factors before approving an OIC including your ability to pay, income, expenses, and asset equity when evaluating an OIC.
- Eligibility requirements: You must file all required tax returns and make estimated tax payments for the current year. If you are in an open bankruptcy proceeding, you cannot apply.
- Application process: Submit proper paperwork including Form 433 and Form 656, along with a non-refundable application fee and initial payment. The IRS will review your financial situation to determine if your offer is acceptable.
Offers in compromise can provide significant relief, but they require careful consideration and thorough preparation.
#2: Installment agreements
If you cannot pay your tax debt in full, an installment agreement allows you to make monthly payments over time. This option can help you manage your debt without facing immediate financial strain.
- Types of agreements: The IRS offers several types of installment agreements, including short-term and long-term plans. Your eligibility depends on the amount you owe and your financial situation.
- Application process: You can apply online, by phone, or by submitting Form 9465, Installment Agreement Request. The IRS will review your application and determine the terms of your agreement.
Installment agreements provide a structured way to pay off your tax debt gradually. The IRS does have strict criteria to use this option, and it is important to make all payments on time to avoid defaulting on the agreement.
These two tools can help taxpayers to manage their tax debt. Remember, taking action is the first step towards resolving your tax issues and regaining peace of mind. Using these tools wisely can help you to regain your financial footing and get tax bills under control.