You owe the IRS tax and you need to know how to settle IRS debt. You undoubtedly have questions. What are your options, will you have to pay the full amount, and how do you get started? Will you need a lawyer? How will this affect your credit rating?
There are five methods of settling IRS debt. The first is an Offer in Compromise, or OIC. The IRS has recently changed the tax laws to make it easier for an individual to file an OIC request, without requiring the assistance of a tax professional. An OIC will settle your debt for less than you owe, rather than having the debt remain outstanding or making structured payments. By filing an OIC, you make an offer to the IRS to pay less than the full amount of your tax debt. The IRS may (but may not) accept this offer, especially if they doubt they could collect the full amount of tax debt. To file an OIC, complete IRS Form 656, which is available through the IRS web site. You must either submit a 20% down-payment or begin making monthly payments immediately.
Another method to settle IRS debts is by declaring Chapter 7 or Chapter 13 bankruptcy. Filing for bankruptcy has far-reaching effects on your credit rating, and you should only consider this option if you are certain your tax debt will be eligible for elimination. Not all tax debt is eligible for elimination; factors that determine eligibility include the age of the debt and whether the IRS considers the tax return to be fraudulent. You will need to consult an attorney to declare bankruptcy.
Next, you can settle IRS debt through a repayment plan. The IRS may consider an installment agreement to repay your tax debt in certain situations, such as if the debt is less than $10,000, you haven’t filed late or paid late in the past five years, and the debt will be paid off within 3 years.
The IRS has a new program that offers partial installment agreements, repaying your debt over a longer term at a reduced rate. A partial installment agreement may be easier to file than an OIC, but you will need to consult a tax professional. With a partial payment agreement, you will make regular monthly payments to the IRS. After the installment agreement terms are fulfilled, the rest of the tax debt is forgiven.
The final method to settle IRS tax debt is called Not Currently Collectible. Under this agreement, the IRS voluntarily agrees not to pursue the debt for a period of time, such as a year, if they agree that the taxpayer currently has no means to repay the debt. The IRS will stop all collection efforts, including levies and garnishments, during the agreed-upon period. To request this status, you must complete IRS Form 433-F, Collection Information Statement, which is available through the IRS web site.
When considering your options, keep in mind that there is currently a 10-year statute of limitations for collecting tax debt. This 10-year window may make the IRS either more or less willing to accept one of these options. For example, they may be more willing to accept a partial lump-sum payment if the period is nearing an end, or they may be less willing to accept a payment plan if the debt will not be repaid quickly enough.
In summary, if you have significant tax debt, you now know how to settle IRS debt in several different ways, depending on your specific situation. This article provides a brief overview of the methods and definitions of each; however, you should consult a tax professional to discuss your specific situation.
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