Filing taxes on time is essential for every American taxpayer who makes money. Yet, extraordinary circumstances may emerge that leave you unable to pay the taxes owed by the deadline. Because the IRS recognizes this, it allows taxpayers to settle their taxes.
Income tax payment plans can be generally granted and administered by the IRS and involve periodic payments to eliminate the whole amount of the tax debt.
Not only can you delay the payment, but in some cases, you can even decrease your overall tax rate. This is quite attractive to those who want to misuse it. As a result, the IRS has set general and particular practices and guidelines that have to be fulfilled to allow you to obtain tax settlement options.
What Is a Tax Settlement?
An IRS tax settlement, which is also known as an offer in compromise, permits a taxpayer to pay a smaller amount of tax either in a lump sum (all at one time) or through short-term installments. Taxpayers who enter into this arrangement must prove to the IRS that they cannot meet the tax amount until the tax deadline.
Monthly payments are usually made under installment agreements until the amount owed is paid. Paying a smaller amount in one lump sum is easier to qualify for than an installment agreement. To be eligible for an installment agreement, a taxpayer needs to:
- Have a monthly income that will allow you to fulfill your payment plan.
- Make sure your tax returns are current.
- Have completed paying the majority of your late fees and state taxes.
Advantages of an IRS Tax Settlement
Tax debt relief is incredible news for many people who have fallen into financial trouble. Better, the IRS normally freezes penalties and interest once your tax settlement is authorized. You can thereby avoid having your wages garnished.
Your authorized amount will almost instantly be reduced from your tax liability. This greatly facilitates your capacity to budget your way to financial stability promptly. It also just relieves stress. When less tax is due, you have more money to pay off other debts and necessities.
Types of Tax Settlement
The IRS provides different settlement options because people seek settlements for various reasons. Several options are available to ensure fairness and that taxpayers in any situation have a practical way to pay off their tax debts.
1. Offer in Compromise (OIC)
The tax settlement alternative, an offer in compromise (OIC), enables taxpayers to make smaller payments than they were owed. Remember that only roughly 50% of OIC applications are approved each year. To be eligible for this option, you must demonstrate your genuine need for tax relief. In particular, OIC is available to taxpayers who owe more than they could realistically pay off at once.
2. Currently Non-Collectible (CNC)
The account status choice, Non-Collectible (CNC), indicates that a taxpayer’s gross monthly income is less than their National Standards allowable expenses. If you are qualified for the status, the IRS will delay the collection of the debt until you receive the money. However, interest and late fees are charged in addition to the tax that you will have to pay.
3. Installment Agreement (IA)
Installment agreements may not reduce your overall tax liability, but they are an opportunity to pay what you owe over a longer period of time. Installment agreement funds are typically collected throughout a monthly installment period that may last up to six years. To remain eligible for IA, you must complete no other procedures besides filing taxes.
4. Penalty Abatement
A taxpayer who genuinely wanted to pay their debt on time and could not because some circumstances occurred beyond their control is qualified for a penalty abatement. To qualify, you must demonstrate that you attempted to make the payment on time but were not able to do it due to unforeseeable circumstances. You will also have no IRS penalties for the three years before the tax year you requested penalty abatement.
How Does Tax Settlement Work?
A tax attorney is typically not required to apply for a tax settlement. Instead, you must fill out numerous documents to begin your application process. The way you apply will depend on the IRS settlement option you choose.
- Offer in Compromise: With Form 656
- Installment Agreement: Online or Form 9465 and Collection Information Statement
- Currently Not Collectible Status: It is mandatory to communicate directly with the IRS at 800-829-1040
- Penalty Abatement: Form 843
It is acceptable to discuss your options with the IRS. This conversation usually takes place between the agency and you. However, it’s possible to seek professionals’ help to contribute to the discussions. Some companies offer tax settlement services for this kind of talk.
Who Qualifies for a Tax Settlement?
A taxpayer who can prove that they cannot make full payment of their taxes because of events beyond their control is only eligible for a tax settlement. They also cannot afford to have a history of failed or missed tax returns.
If the taxpayer is an employer, he or she is also responsible for every payroll tax payment and filing. Also, if a taxpayer is insolvent, he or she cannot agree to the tax debt. Regarding these regulations, what might be seen as extraordinary—such as earthquakes, hurricanes, or stolen credit cards—can be considered precisely relative to a differential.
Although handling IRS tax debt can be frustrating, knowing your choices is the first step to getting your finances back in order. But keep in mind that, regardless of your course of action, keeping the IRS updated on your situation will be crucial to helping you determine the best way to resolve your tax burden and reclaim control over your financial future.
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