A significant federal tax debt is not only stressful, but it can also impact the rest of your finances. Ignoring it will only make matters worse, especially since sooner or later you will find yourself on the receiving end of a lien, levy, wage garnishment, or some other collective action. When you do not have sufficient funds to pay off your debt, you do have choices for a tax settlement. The IRS has several programs in place, some of which are part of the Fresh Start Initiative, to help taxpayers. These include an Offer in Compromise, Installment Agreement, Penalty Abatement, Currently Not Collectible and Innocent Spouse Relief. Each one has unique qualifications and criteria, but most taxpayers find that they qualify for at least one. There are a few ways to check whether or not you qualify for a tax settlement.
Review the Eligibility Requirements
One way to check if you qualify for a tax settlement is to review the eligibility requirements set in place by the IRS. Although it may seem overwhelming once you look at the form, you can typically find a very basic guideline as to who is qualified. Most of the tax relief programs require you to be compliant with your taxes, including all tax returns filed and all taxes paid (other than those for which you owe your debt). Here are the very basic criteria for each program:
- Offer in Compromise: No open bankruptcy proceedings, all federal tax returns filed, all estimated tax payments or tax deposits paid.
- Installment Agreement: All tax returns filed, pay all future taxes on time, and pay your monthly payment on time throughout the term of the agreement.
- Penalty Abatement: Reasonable cause (decided on a case by case basis) for not being able to file and/or pay your taxes on time. First timers (those who have had no penalties in the previous 3 years) more easily qualify through the First Time Penalty Abatement. All tax returns must be filed and arrangements in place to pay for any taxes not already paid.
- Currently Not Collectible: Your income and assets are not sufficient to pay for your allowable monthly expenses.
- Innocent Spouse Relief: Filed a joint form for which there was a problem that was completely the fault of your spouse, you had no knowledge and no reason to know of the problem, and it would be unfair for you to be held accountable.
Just because you meet one or more of the criteria for a tax relief settlement does not guarantee that your case will be approved. However, it does mean that you can apply to try to reduce, remove or otherwise help you with your tax debt.
Know What Your Tax Debt Includes
When you check whether or not you qualify for a tax settlement, it helps for you to understand what your tax debt includes. For many, a significant portion of their tax debt is due to penalty fees rather than the original taxes owed. This may mean that Penalty Abatement would be a better fit for you, as long as you meet the other criteria.
Consider Your Tax History
The majority of the tax relief programs by the IRS require you to be otherwise compliant with the IRS. This means that you need to have all your previous tax returns filed and all other taxes paid. A significant portion of taxpayers who owe back taxes do so because they never filed their returns in the first place. It may be that you can reduce or even remove your tax debt by filing your returns.
What is Your Current Financial Situation?
Some taxpayers get hit with a huge tax debt when they already find themselves in a bleak financial situation. This may be that they have had to declare bankruptcy, lost their house, have an underwater mortgage, lost a job, or some other situation. Before you start looking for tax settlement options, it is beneficial to consider your current financial situation. This will help you to see not only for which options you qualify but also which may be the best for your situation. For example, some people simply need to pay down their debt over time, while many have found themselves in such a dire financial problem that they need to be declared Currently Not Collectible or try to get the IRS to approve an Offer in Compromise.
Talk With a Professional
It may be confusing to navigate the qualifications for all the different tax settlement options. Discussing your case with a tax professional, such as those at Fidelity Tax Relief, can help you to better understand your options. They constantly are negotiating with the IRS on their clients’ behalves, so they already have sound knowledge of the various qualifications.
At Fidelity Tax Relief, we use our expertise to review your case and determine the best solution for you. Additionally, we talk to the IRS on your behalf to negotiate a settlement that best matches your situation. Download our eBook on Tax Relief Settlement Options to learn more about your different choices, including for which ones you may qualify.