When you’re dealing with significant tax debt, quick settlement solutions that get you out of debt immediately are tempting. Unfortunately, the reality is that resolving tax debt isn’t a quick fix. There are ways you may be able to pay less over time or settle your tax debt for one lump sum, but it isn’t nearly as easy as the TV, radio, and internet ads make it seem.
To settle your tax debt for less than you owe, you have to go through an in-depth financial analysis and application process. Learn more about the myths you’ve likely heard about settling your tax debt. Or contact the W Tax Group today to see if you might be a good candidate for a settlement.
Key Takeaways
- An offer in compromise does allow you to settle your tax debt for less, but it is only available to a small fraction of taxpayers.
- There are many other payment options available, including installment agreements and currently not collectible status.
- Avoid working with tax resolution firms that push quick solutions that seem too good to be true.
- Working with an experienced tax professional can help you find the right solution more quickly.
Myth #1: Settlements Are Available—You Just Have to Ask
The main form of debt relief that allows you to settle your debt for less than you owe is called an offer in compromise, but qualifying for it is not nearly as easy as just asking for it. Some tax resolution firms make it sound this way in an effort to drum up business; they imply that if you work with them, you can access a secret path to tax debt relief. But that’s not exactly true.
Securing an offer in compromise requires you to undergo a long application process that delves into every area of your personal (and business) finances. In addition, if you are not current on your tax filings and estimated payments (if applicable), you won’t even be considered. Statistics differ from year to year, but generally, between one-third and 40% of offer-in-compromise applications are accepted in any given year. It’s not as easy as it may seem.
Myth #2: Debt Reduction is a Limited-Time Offer Tied to the IRS Fresh Start Program
The term “fresh start program” is another one that comes up a lot in tax relief ads. However, the Fresh Start Initiative isn’t so much a program as it is a collection of tax relief and payment options. When the IRS started this initiative, they did so in an effort to help taxpayers get compliant, avoid aggressive collection actions, and catch up with tax debt. But the tax relief industry likes to talk about this initiative as if it’s a limited-time offer or something you need to apply for. Neither of these points is true.
Be wary of companies or individuals encouraging you to apply now before the window closes. While there is some urgency in finding the right tax relief option, the importance of urgency is more about avoiding liens and levies than it is about the IRS taking away relief options. Rather than rushing into anything, it’s important to take your time learning about relief options, figuring out what you qualify for, and going from there.
Myth #3: An Offer in Compromise is Your Only Payment Reduction Option
The offer in compromise program is talked about and advertised so heavily that other payment relief options don’t get the attention they deserve. But an offer is not the only relief option. In fact, it’s not even the only settlement option. Here are some alternatives:
- Installment agreement. The main benefit of this option is that most taxpayers can apply online and get an immediate decision. You can spread your payments out over 120 months (as long as everything is paid off by the collection expiration date), which gives you a lot more breathing room in your budget.
- Partial payment installment agreement. If you are unable to afford the minimum monthly payment on a standard installment agreement, this may be an option. You make monthly payments based on your budget until the debt expires, and then, the IRS waives the remaining balance due.
- Currently not collectible status. This option offers temporary relief from all collection efforts. You still owe the debt (until it expires) but you don’t have to make payments, and the IRS doesn’t pursue collection actions.
You can also look into penalty abatement. This provides relief from penalties, including the failure-to-file and failure-to-pay penalties, if you meet certain requirements. This can significantly bring down the amount you owe.
Myth #4: There’s No Harm In Applying
This is good advice in lots of areas of life, but not tax relief. You actually could lose quite a bit if you apply when you don’t have a chance of qualifying. To start, the application process is extensive. It takes a long time to gather all of the necessary documentation and fill out the application forms. On top of that, you have to pay to apply. The fee is typically $205, although low-income taxpayers may have the fee waived.
You must also send a down payment with your application. If you make a lump sum offer, your down payment is 20% of the offer. If you have a periodic payment offer that spreads payments out over several months, you have to send the first month’s payment in with your offer. Additionally, you must make that monthly payment every month while the IRS processes your offer.
If your application is rejected, you do not get your down payment back—and if you made monthly payments, you don’t get those back either. Those funds are applied to your tax debt, but that still can be a very hard pill to swallow for those who are already working with a very limited budget.
To drive the point home, let’s talk about the time investment. You could easily spend six months or more waiting for the IRS to make a decision regarding your offer in compromise application. If you don’t qualify, that’s six months you could have spent exploring other payment options. It can be extremely disheartening and discouraging to mentally invest in a tax relief solution and have it not pan out after six months. There are other drawbacks to the OIC program as well.
Which Options Are Best for You?
The offer in compromise is definitely a viable option for some taxpayers, but remember that it isn’t the only solution available. Use this table to figure out which option is best suited to your needs and situation.
| Relief Program | Who It Benefits | Outcome |
|---|---|---|
| Offer in compromise | Those with limited assets and income relative to the amount of tax debt they have | Settle tax debt for less than what is truly owed |
| Partial payment installment agreement | Unable to pay full balance or the minimum monthly payment but can put some money toward tax debt each month | Some tax debt is paid off, remaining balance is written off at the end of the collection period |
| Currently not collectible | Unable to pay anything due to current financial situation | Temporary stop to collection efforts; collection efforts may resume if financial situation changes |
| Installment agreement | Able to pay tax debt off in 72 monthly payments | Tax debt paid in full after 72 monthly payments |
| Penalty abatement | Those with a history of tax compliance or reasonable cause for penalty relief | Reduction in tax bill due to removal of penalties |
| Filing returns over Substitutes for Returns | Taxpayers who had Substitutes for Return filed by the IRS due to failure to file | More accurate tax bill that accounts for credits, deductions, and exemptions that can lower what you owe |
Why Working With a Tax Professional is Important
While you technically could find your way through tax resolution via trial and error, that can be an expensive and time-consuming way to figure out which form of relief is best suited to you. Additionally, the longer you take to get your tax debt taken care of, the more likely it is that the IRS will place a lien on your assets or garnish your wages.
Tax debt resolution is complicated, especially with the long list of programs available and the unique requirements for each. When you work with a tax professional focused on tax relief, you can save yourself a considerable amount of time and stress. Our team will look at your financial situation, review your tax transcript, and advise you on which options you do and do not qualify for. From there, we can take on the application process, negotiate with the IRS on your behalf, and take steps to avoid enforced collection actions.
Tax relief is possible, but it isn’t easy. Choosing the wrong solution or not doing your research could cost you money, time, and stress. When you work with the team at W Tax Group, you can find the right solution for your tax situation and feel the peace that comes with handling your tax debt. Call us at 877-500-4930 or contact us online now to schedule a consultation to talk more about your needs.
Sources:
https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/Most-Serious-Problems-IRS-Fresh-Start-Initiative-Service-Delivery.pdf
https://www.irs.gov/pub/irs-news/ir-11-020.pdf
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs
