If you’ve failed to file one or more tax returns, or you’ve accumulated a tax bill that seems insurmountable, we understand how overwhelming that can feel. While you may be tempted to ignore the problem, it’s important to know that the IRS will not go away or give up on collecting the debt that’s owed.
The good news is that you can still climb out from under the hole in a way that allows you to live a normal life and not head straight to the poor house. In this article, we’ll share five tips for settling an unpaid tax balance and solving your tax problems.
Tip 1: Get Temporary Relief with “Currently Not Collectible” Status
The IRS can be ruthless when it comes to collections. They can drain your bank account, garnish your wages, and attach a tax lien to your property.
If you are in a situation where you legitimately cannot pay your tax bill, you can temporarily pause all collection attempts by getting the IRS to classify your debt under Currently Not Collectible, or CNC, status.
You’ll have to prove, of course, that you can’t currently pay anything. You will also continue to accrue penalties and interest, but at least you’ll have some breathing room while you get your finances in order and improve your situation.
Tip 2: Don’t Accept a “Substitute Return” at Face Value
If you didn’t file taxes and the IRS finds out about it, they’ll file something called a substitute return. This type of return is the IRS’s “best guess” at your income and how much you owe. These returns will not consider your deductions, so inevitably, they are a worst-case scenario that overestimate your tax balance.
Instead of agreeing to pay the amount the IRS says you owe according to the substitute return, your best bet is to file your own tax return for the year (or years) that the IRS has created a return for you. Make sure you include all legal deductions or credits so that you can minimize your tax bill as much as possible.
The sooner you act on this matter, the better. The reason is that the IRS will continue assessing interest and penalties on the debt until it’s paid off or you come to an alternate agreement.
Tip 3: Set Up a Payment Plan
The idea of paying your entire tax bill in one fell swoop may not be practical, even if you technically have the cash. By writing a massive check all at once, you could end up in a precarious financial position, making paying future taxes difficult.
The IRS can be reasonable, and the agency will often agree to an Installment Agreement (IA). Even if you owe multiple years of taxes, you can still qualify for this arrangement. We typically recommend agreeing to pay as much as possible each month to minimize the amount of interest and penalties that continue to accumulate until your debt is paid.
For relatively small balances (under $10,000), you can file all the paperwork yourself, but if you owe a significantly larger amount, you will likely benefit by hiring a tax specialist to help you optimally structure your payment plan.
Tip 4: Negotiate for a Reduction or Elimination in Penalties
Tax debt by itself can be massive, and when you add in interest in penalties, the sum you owe can rise meteorically. The older the debt, the more expensive it becomes as the interest compounds. Because of this, a small debt can become much larger than the original balance.
Though the IRS won’t grant a penalty abatement to just anyone, it may be negotiated if you can demonstrate that you had a compelling reason for not paying your tax bill or avoided filing. Valid excuses include a death in the family or surviving a natural disaster. Unfortunately, a run of the mill financial hardship usually won’t qualify for this arrangement.
While your principal will remain unaffected by an abatement, you could see a drastic reduction in your balance when the interest and penalties get docked.
Tip 5: Request an Offer in Compromise (OIC)
In some circumstances, the IRS will agree to accept less than what you owe. This arrangement is referred to as an Offer in Compromise, or OIC for short. The way an OIC works is that you offer to pay a percentage of your tax balance instead of the total amount. If the IRS agrees, then you have a limited time to pay your bill, and the remainder of the debt is wiped clean.
This process can take several months, and the IRS will do a deep dive into your finances. You will have to be able to prove that you are unable to pay the balance in full in a reasonable amount of time. However, if the IRS does accept your Offer in Compromise, you can save thousands of dollars and start anew with a clean slate.
Bonus Tip: Avoid Further Delays
When the IRS has turned their attention toward you, there is no relief until you take action toward tax resolution. You will continue to incur penalties until you begin paying your back taxes. Even then, interest continues to be added to your bill at a compounded rate. While dealing with the IRS can be unpleasant, it’s a necessary effect of earning an income in the United States.
In order to take back control of your financial future, you’ll need to handle this matter as soon as possible. At Levy & Associates Tax Consultants, we have a comprehensive team of tax accountants, tax attorneys, and former IRS agents on your side. We can evaluate your situation and make a recommendation for a path to move forward. Contact us at 800-TAX-LEVY to schedule an appointment.