Sometimes, things happen that make it impossible for you to pay a tax bill. Your savings might be stolen by someone who has infiltrated your bank account, you might lose a job or you could simply not earn enough to save what you need for taxes. Perhaps the money your employer put back was not enough, or you can’t pay your tax liability for other issues.
Whatever the reasoning is, the Internal Revenue Service does offer tax debt forgiveness in some cases when you can’t pay your tax liability. There are circumstances under which taxpayers can have their tax debts partially forgiven.
Can the IRS collect more than you can afford?
Technically, you may owe $8,000, but if you can only afford $4,000, the IRS will look at your present financial situation and determine if $4,000 is really all you can do. If so, then the IRS won’t try to collect more than you can reasonably pay. In fact, if collection activities would make you enter into a financial crisis, the IRS can’t collect that much in back taxes. This is a protection to prevent the IRS from causing bankruptcy or other financial issues.
Why is it smart to look at an offer in compromise?
If you can pay part of the tax debt you owe, then there is an IRS government payment plan that might help you called an Offer in Compromise. Essentially, you’re offering as much as you can afford to resolve the tax debt, even though it’s less than you would normally have to pay. Usually, the IRS allows this to be paid in fixed monthly installments or as a lump sum.
To help you qualify for the OIC, the IRS has also created the Fresh Start initiative, which allows the IRS to look only a year into the future when determining collection potential if you’ll pay in five or fewer months. Previously, the IRS was allowed to look up to five years in the future. If your agreement is for up to 24 months, then the IRS will look two years into the future instead of five.
The IRS also expanded the Allowable Living Expense, which means that you can reduce the amount you have to pay the IRS by showing credit card debt payments, bank fees and other expenses that you already have.
Your attorney can walk you through the process of eliminating tax debt with the OIC method if it’s right for you.