A fair number of U.S. citizens have found themselves saddled with unpaid federal taxes, which have led to a seemingly insurmountable debt. The Internal Revenue Service (IRS) aggressively pursues taxpayers who continue to accrue additional tax debt, and indeed, the federal government has several options at its disposal to collect on this unpaid tax debt.
Some of the collection methods available to the IRS include accessing stiff levies and/or wage garnishment. In the most serious of tax cases, unpaid federal taxes can lead to a felony conviction and a federal prison sentence. But the good news is that the IRS has approved a number of different payment strategies for those citizens who act in good faith to settle their back taxes. A few of these settlement options are installment agreements, partial payment installment agreements, offers in compromise, or proving a financial hardship.
Installment Agreements
Tax debt is governed by a different (i.e. more strict) set of regulations than consumer credit debt. For the most part, private financial institutions (creditors) give debtors room to legally maneuver through a substantial debt. But the federal government operates with a heavier hand should unpaid federal taxes begin to collect significant interest and remain unpaid for a specified period of time.
At this point in the tax settlement proceedings, taxpayers are notified by the IRS of an inevitable action if a settlement agreement is not reached by a specified date. So taxpayers, essentially, have two broad options before them: hire a tax settlement professional or negotiate with the IRS directly.
The better choice depends on the taxpayer’s unique financial situation and willingness to settle the tax debt in good faith. Tax professionals who work on behalf of debtors include certified public accountants (CPA) and tax attorneys. Together, these two professional possess a wealth of knowledge concerning the tax code and the applicable laws. Also, the IRS recommends taxpayers who own more than $10,000 seek the consultation of a tax professional.
An installment agreement amounts to a structured monthly repayment plan similar to a consumer debt management plan. The paperwork can be filed by the taxpayer or a tax professional. This settlement is the most commonly deployed tax debt solution. Once the IRS accepts the terms of the installment agreement, the taxpayer will be considered in good standing with the federal government provided the debtor maintains the agreed upon minimum monthly payments.
Partial Payment Installment Agreements
Known by the IRS as PPIAs, partial payment installment agreements were initiated in 2005 and work much in the same manner as the aforementioned installment agreements. The difference between the two forms tax settlements is partial payment agreements by definition relieve the taxpayer of the full tax liability. Instead, the federal government agrees to the terms of a schedule of regular minimum monthly installments on a portion of the original tax liability.
So since this method of paying down unpaid federal taxes is a relatively new option at a taxpayer’s disposal, the IRS advises interested debtors to seek the consultation of a tax professional. Certified accountants and attorneys keep abreast of the latest amendments and/or revisions to the tax code. Someone settling their own unpaid taxes without their professional services may cause more harm than good.
Offers in Compromise
The IRS defines an offer in compromise as “an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed.” Debt settlement companies that promise negotiating tax payments for less than the amount owed use this method to unburden taxpayer from mounting tax debt. The federal government will accept a lower tax payment only if the taxpayer has established an inability to pay the debt outright, or by enrolling in one of the installment arrangements discussed above.
The key factor to securing an offer in compromise is the debtor’s reasonable collection potential (RCP). The federal government tallies the debtor’s total asset value, income, and basic living expenses to derive a RCP figure. The RCP is then used to determine whether or not the taxpayer qualifies for an offer in compromise which can be settled by a lump sum or a short-term installment arrangement.
Proving Financial Hardship
The last line of defense for taxpayers trapped under tax debt is providing proof of a financial hardship. The only other settlement option besides financial hardship is filing for bankruptcy, the effects of which can last for years. For instance, taxpayers who have lost their job and fallen into heavy debt on top of their unpaid taxes can qualify for a number of different exemptions. The IRS allows those with a legitimate financial hardship the opportunity to delay defaults on settlement agreements and offers in compromise. Also, the IRS can expiate the process of lifting any levies against the taxpayer’s property or other assets. To put it simply, the IRS provides a fair number of payment options for all taxpayers saddled with unpaid taxes.
