Start Over with the IRS

You may find yourself in a tough situation if you can’t pay the money you owe to the Internal Revenue Service (IRS). The difficulties can mount because it is harder to get or keep a job or obtain affordable credit of any kind with tax debt. Many tax experts and consumer advocates have accused the IRS of failing to assist those who are trying to pay off their taxes. But, there is a way to hit that tax debt without ruining your relationship with the IRS. Consider applying for an offer in compromise, which helps you settle your tax debt without creating a financial hardship.

Key Takeaways

• You may find yourself in trouble if you don’t pay off your tax bill to the IRS.
• An offer in compromise may allow you to pay off your outstanding tax bill at a lower amount.
• You must qualify and fill out the pre-qualifier tool to see if you’re eligible.
• If you are eligible, fill out Form 433-A and wait for the IRS to accept your offer.
• If you don’t qualify or your offer is rejected, you can apply to pay off your outstanding tax debt using a payment plan.

What Is an Offer in Compromise?

Avoiding your tax bill is never a good idea, especially when you owe a large sum of money. If the amount you owe is legitimate, you may face interest, penalties, and eventually liens and levies on your state tax refunds, wages, and property. Failing to pay your bill over a long period can lead to a complex case that can only be resolved to the taxpayer’s satisfaction in a tax court. But it doesn’t have to get to that point.

An offer in compromise is a tax settlement tool that allows you to pay off less than the full amount owed to the Internal Revenue Service. It works by having you pay when you can immediately, then choosing the best option to help you clear your balance off over time.

The offer in compromise replaced the Fresh Start program, which was established in 2011. The goal was to help those who were greatly impacted by the recession. The Fresh Start program was designed to give taxpayers who owed substantial back taxes the opportunity to consolidate their tax bills and pay them off in a convenient and orderly fashion.

Advisor Insight

If you genuinely feel that you don’t owe the amount of tax assessed to you, you may be able to find relief with the Taxpayer Advocate Service or the Appeals division within the IRS.

How to Qualify and Apply

To see if you qualify, you must use the offer in compromise pre-qualifier. This is a tool that determines your eligibility and tax filing status. It can also help you calculate a preliminary offer on your tax debt. Keep in mind that this tool is only available for individual taxpayers—not partnerships and corporations. You are also exempt from the tool if you live overseas, in a U.S. territory, or a military member who doesn’t qualify.

You are eligible if you meet the following requirements:

• You filed all required tax returns and paid all your estimated payments
• You do not have an open bankruptcy proceeding
• You received a valid extension for a current tax year

You must answer questions about the following:

• Your status
• Basic information, including information about your household and outstanding tax debt
• Your assets
• Your income
• Your total expenses

Once you input your answers, the tool will give you a proposal. In many cases, you’ll have an option to choose. You can then prepare your offer in compromise by filling out 433-A. You can use Form 656, which is the guide for an offer in compromise, to help you. The IRS will make a final decision based on the information provided on your form.

A $205 application fee applies to any offer in compromise.

If Your Offer Is Accepted

The IRS will notify you by mail if your offer in compromise is accepted. Your notice may indicate a request for additional information. If you make any initial payments, they will be applied to your outstanding debt along with any fees that you may submit. The IRS may also take other actions while your offer is pending, including:

• Filing notice of federal tax lien
• Suspending additional collection activity
• Extending the legal assessment and collection period

If the IRS doesn’t reply with a decision within two years of receiving your offer in compromise, it is automatically accepted.

If Your Offer Is Rejected or You Don’t Qualify

Not every offer in compromise is accepted or you may not qualify. If either of these situations apply to you, don’t fret. You still have options available. If you apply and aren’t eligible, the IRS will inform you in writing. The agency will also return your application fee or apply the fee directly to your outstanding tax balance.

If you are rejected, you can appeal the decision. Your appeal must be made in writing using Form 13711: Request for Appeal of Offer in Compromise within 30 days.

You can also apply for a payment plan to pay off your debt over time. Individual taxpayers can apply online to pay their tax bills in installments. If your payment plan is approved, you may be required to pay additional fees, penalties, and interest.

What Are the Fees Associated with Back Taxes?

The IRS imposes fines and penalties on people who don’t file their taxes and on balances that aren’t paid on time. You’ll also be penalized if you don’t file an accurate return. The IRS charges you interest on any balance owed from the due date. Interest rates are set each quarter. For returns that are filed on time but aren’t paid, the IRS imposes a penalty of one-half of one percent for each month up to a maximum of 25%. You are responsible for 5% of the tax owed each month if you don’t file on time and owe money to the IRS.

How Many Years Can the IRS go Back for Unpaid Taxes?

The IRS generally has 10 years to collect any unpaid taxes after completing an assessment. Keep in mind that the IRS has three years from your filing date to complete an assessment to see if you have any additional taxes owing.

Can I Set up a Payment Plan Through the IRS?

Yes, you can use a payment plan to pay your taxes to the IRS. You can apply to pay your taxes in installments by completing an application online. You may qualify for a short-term or long-term payment plan based on how much you owe. Plans vary and may come with a setup fee along with penalties and interest.

The Bottom Line

The offer in compromise was designed as a way to help thousands of delinquent taxpayers who are struggling to catch up on their tax debt. Taxpayers can settle their tax debt by paying less than they owe as long as they qualify. You must complete the qualifying tool and fill out Form 433-A to see if the IRS accepts your offer.