When trying to settle your taxes owed with the IRS, it may seem like the only option is to pay the whole balance. For some people, that is the case, while others have more options. IRS tax liability resolutions vary from just abating penalties to settling your balances with no payments at all. Each resolution comes with different qualifications and requirements for paperwork. Most resolutions look at your current financial situation to determine if you qualify for it or not. Here are the different resolution options you have.
Offer in Compromise (OIC):
An offer in compromise is an agreement between the IRS and the taxpayer settling your tax liability for less than you actually owe. The positives of an OIC is that you can settle tax balances for as low as $5, although amounts vary and depend on your finances. An OIC requires one payment to be made to the IRS and then your tax balances are settled, as long as you remain compliant. If you are being threatened with a levy, filing an offer can prevent future levies.
While an OIC has some benefits, it does have some downfalls. OIC’s are very hard to qualify for. Along with submitting the basic paperwork, you usually are required to disclose your finances and substantiate all expenses and income. You are assigned an Offer Specialist, who may require more paperwork. Once you submit the actual offer, it can take over a year to be approved. Usually, it takes months for the IRS to even look at your offer and then you are assigned an offer specialist. Also, when you file your offer, liens are automatically filed but removed later once the offer is accepted and paid. You must also stay compliant with the IRS after your offer is accepted.
Partial Pay Installment Agreement (PPIA):
A partial pay installment agreement is a payment plan with the IRS that allows you to pay off a portion of your tax balances in monthly payments until the tax liability expires. Like an OIC, a PPIA has the potential for large tax savings. The monthly payments are typically affordable for taxpayers and you can avoid levies if the payment plan is kept and you avoid any new taxes owed. The monthly payment varies for taxpayers and depends on how much you owe and how much disposable income you have each month.
The downsides of a PPIA is like the OIC, they are very hard to qualify for. Because of the possible savings, the IRS makes sure you have financial hardship before they will let you enter into the agreement. Like an OIC, you will need to provide all forms of income and all your expenses. Equity and other types of savings can be looked at as well. The IRS can review your payment plan if they find your financial situation has improved and you could afford a higher payment. Liens can be filed in this agreement.
Streamlined Installment Agreement (SLIA):
A streamlined installment agreement is a simple payment plan for those who owe less than $50,000 to pay off their tax liability with the IRS within six years. To get into this payment plan, you will not need to disclose financial information to qualify. You will avoid levies if you keep up with your payments and you don’t accrue new balances.
While other resolutions are able to save you money, an SLIA rarely saves taxpayers money in the end. Unlike the PPIA, with an SLIA you may have a high monthly payment. While no new liens will be filed once you enter into the payment plan, all prior lines will remain until your final payment is made.
Full Pay Installment Agreement (FPIA):
A full pay installment agreement is a monthly payment plan with the IRS that pays off the total taxes owed in 6 years or less. This payment plan does allow you to pay off your whole tax liability, so you don’t have to worry about the liability anymore. You also will not have to disclose financial information to qualify for the agreement. With this agreement, you can also avoid collection action.
Like an SLIA, you have the potential to have a high monthly payment if you choose a full pay installment agreement. Any liens filed before the agreement is made will stay until your final payment. It is also unlikely that you will save money if you enter into this agreement.
Currently Not Collectible Status (CNC):
Currently Not Collectible Status is a status for taxpayers experiencing financial hardship that defers a taxpayer from paying outstanding tax balances until their financial situation improves. With CNC, you do not have to make any type of payments and you can avoid levies if you don’t accrue new balances. CNC is a status and can change. Some taxpayers stay in CNC until their tax balance expires, while others have their status reviewed. If you stay in CNC until your balance expires, your tax balance is gone and you no longer have to worry about paying it back.
CNC status is meant to be a temporary status, so it is often reviewed by the IRS. The IRS reviews your status to see if your financial situation has changed. If your financial situation has improved enough, they may take you out of CNC status and make you start paying off your tax balances. This can happen if you get a job or a significant raise. If the IRS reviews your status and sees you still have a financial hardship, they will keep you in the status. While you must remain compliant with the IRS when in CNC, the IRS will also seize any tax refunds you are due while you are in CNC. Tax liens are also automatically filed when you enter into the status.
Innocent Spouse Relief
Innocent spouse relief relieves the taxpayer of any tax balances incurred due to a spouse or former spouse who neglected to pay the joint IRS tax balances. If you qualify for Innocent Spouse, you can be relieved of all the taxes you owe. The IRS will not take any collection action, levies or liens, against you once you qualify. Also, once you qualify for innocent spouse relief, you don’t have to worry about that tax liability anymore. It is not reviewed by the IRS.
Innocent spouse relief is one of the hardest resolutions to qualify for. You must prove your innocence in the taxes owed to the IRS. This can require a lot of paperwork and proof and that can be hard to obtain and substantiate.
Tax resolutions vary in all aspects and its best to get professional advice on which options would be available to you. Each resolution comes with its pros and cons, and what works for you will depend on your financial situation. At Polston Tax, our experienced legal team knows all the available options for taxpayers and will know what it will take for you to qualify. Contact us or schedule your free consultation and let us take the stress of dealing with the IRS off your shoulders!