IRS tax debts are nothing to be scared of, as long as you follow these easy steps on IRS tax debt settlement.
How to Settle IRS Tax Debt | A Step-by-Step Guide
Step 1: Apply for an Offer in Compromise
Most people acquire tax debts due to having financial problems, or due to inability to pay the full amount of your tax debts. In these instances, the IRS provides a solution called the Offer in Compromise (OIC).
Offer in Compromise Definition: an agreement wherein a taxpayer settles his tax liabilities with the IRS for less than the full amount he owes.
Not everyone, however, may qualify for OIC. The IRS takes a critical look at the following circumstance of an applicant to determine if they will grant the application:
- ability to pay
- sources of income
- extent of expenditures
- asset equity
If the IRS sees that an applicant is capable of paying the full amount given the qualifiers above, they will not grant the OIC application. So, the applicant must prove that he has no capacity to pay the full amount he owes the IRS.
If interested, you may choose between these two options in filing an OIC:
- Contact a tax professional or a tax debt resolution service to assist you in your application.
- Try to settle the tax debt by yourself. Download the IRS Form 656 Booklet online to see the full details and instructions in filing your application.
Step 2: Pay the Application Fee
The application for OIC doesn’t come free. One must pay a non-refundable fee of $186 to proceed with the application.
For most applicants, especially those who are in deep financial crisis, paying $186 may be too much. This might even prevent them from seeking OIC, hence putting them more in trouble with the government.
The IRS understands this situation, and so it provides leeway for those under extreme financial trouble. An applicant who will meet the Low-Income Certification guidelines of the IRS will no longer have to pay the $186 application fee.
Or, if the applicant has already paid the fee, he may get a refund. The IRS will inform the paid applicant if he is eligible to request a refund.
Step 3: Provide a Full Financial Disclosure
For the processing of the OIC application, one has to provide details of his financial standing (which covers his income, expenditures, assets, and equity). For applicants who are wage earners and self-employed workers, they must fill out Form 433-A (Collection Information Statement) and submit the necessary supporting documents.
Form 433-A requires one to provide full disclosure of his financial record. And since it entails a “full disclosure” of details, expect to accomplish a very long form — a 10-section form, to be more specific.
The length of Form 433-A might become too complex and complicated. Make sure to fill out the form correctly and completely, otherwise, the IRS will reject your OIC application.
If you are processing a tax debt settlement for a business, you need to fill out Form 433-B. This form is just as long and complex as Form 433-A, so ensure you correctly and completely fill out this form.
Step 4: Negotiate with IRS
Once the applicant fills out the form and submits it, the IRS will then review the application. Tax debt settlement negotiation between the applicant and the IRS will begin only when the IRS accepts the application.
The amount for the tax debt settlement negotiation will depend on the information you put on Form 433-A (or Form 433-B). This means that you cannot simply tell the IRS any random figure or dictate your preferred tax debt settlement amount.
While the tax debt settlement negotiation is happening, your running tax debt penalties and corresponding interest will continue to apply. Penalties and interest will only stop when you reach a settlement with the IRS.
During the negotiation period, the following scenarios are also bound to happen:
- The IRS will apply your non-refundable payments and fees to the tax liability.
- The government, through the IRS, will file a Notice of Federal Tax Lien.
- Because of the pending negotiation, the IRS will suspend other tax collection activities and associate them with your OIC application.
Tax Lien Definition: the government’s legal claim against your property when you neglect to pay your tax debt.
What if the IRS does not act on your OIC within two years after they receive your application? Your OIC then will become automatically approved.
Step 5: Pay the Debt Gradually
Once the IRS accepts the application, you have two years to repay that amount specified in your OIC. The IRS will require an initial payment, which will vary based on the payment option you will choose:
Lump Sum Cash
Under this method, you need to submit an initial payment of 20% of the total offer amount together with your application.
If the IRS accepts your application, you will get a written confirmation. You will have to pay the remaining balance in five or fewer tranches of payments.
Under this method, you need to submit any amount of initial payment together with your application. Then, you have to continue paying the remaining balance in monthly installments until the IRS acts on your application.
If the IRS accepts your application, just continue paying the remaining balance monthly until you finish paying fully.
Despite the OIC payment for tax dues, you still have to continue filing taxes for each new year. If ever you get a tax refund anytime within the period you’re making the debt payment, the IRS will automatically apply the refund to your debt payment to lessen your due.
Settling an IRS tax debt through OIC sure looks like a very simple procedure. However, you have to be extra careful in filling out long forms and in providing information to assure yourself that the IRS will grant your application.
Have you tried settling an IRS tax debt through an Offer in Compromise? Share with us your experiences and learnings in the comments section below.