Each taxpayer has a unique tax debt situation, and each IRS tax settlement program is different. This article will review various settlement options in order to help you find out which one is right for you.
Option One: Abatement of Penalties
The Good: The IRS uses penalties to scare taxpayers and make them pay sooner, but many times they have a legitimate reason for not paying on time. When you qualify for penalty abatement, all or part of the penalties owed will be eliminated.
The Bad: Penalty abatement will only eliminate the penalties added to the initial base amount of tax owed. Furthermore, the IRS requires that you have a good reason to request abatement.
Option Two: Audit Reconsideration
The Good: Since the audit reconsideration option has nothing to do with your current financial situation, the IRS will not ask you to complete a financial statement (Form 433-F).
The Bad: This option only works if you have evidence to support that you have a strong reason for not showing up for the tax audit. It is a time-consuming process, and you may also need to appeal.
Option Three: Installment Agreement
The Good: A full payment installment agreement is fairly easy to obtain, wherein you can pay back the owed tax in monthly payments. Once paid and released, the IRS allows the tax lien to be withdrawn.
The Bad: For easy approval, the tax money owed must be $25,000 or less. Otherwise, Form 433-F is needed. Furthermore, interest may continue to accrue during your repayment time and, along with IRS penalties, the interest rate can reach anywhere from 9% to 12% a year.
Option Four: Partial Payment
The Good: Under the Partial Payment Installment Agreement (PPIA) plan, you are allowed to pay an affordable amount in monthly installments. There will be an overall tax debt reduction because once the collection period (or CSED) is over, all the remaining debt will go away!
The Bad: Full financial disclosure is required, and the IRS will evaluate your financial situation on a regular basis. If they find that you can afford to pay more, you will be asked to do so. Your tax refund can be intercepted by the IRS to pay the debts.
Option Five: Currently Non-Collectible (CNC)
The Good: This is even better than the Partial Payment Installment Agreement, as you will be paying nothing to the IRS. While in non-collectible status, a 10-year statutory period could pass, and the entire tax debt will expire.
The Bad: The IRS will monitor your financial situation very closely to see if it has improved. There won’t be levies, but you will still be subject to federal tax liens on your property.
Option Six: Offer in Compromise (OIC)
The Good: An OIC will substantially reduce your tax liability and also put the collection activities on hold. It will have a positive impact on credit ratings.
The Bad: This is definitely the hardest IRS tax settlement option to qualify for. To get accepted, the offer you make should be a good deal for the IRS. You will lose all tax refunds, including the interest for that period. The taxpayer must be in tax compliance with the IRS code pertaining to paying taxes and filing returns for 5 years. Otherwise, the IRS will reinstate the full amount of tax liability.
Option Seven: Chapter 7 Bankruptcy
The Good: Old income tax debts can be discharged in Chapter Seven bankruptcy. Rules are simpler than other settlement options, and you can come out from the debt burden much more quickly.
The Bad: Your credit score will drop drastically. Payroll taxes can never be eliminated in bankruptcy. It will not remove any prior recorded federal tax liens.