You know what they say; there are two things that are inevitable in life: death and taxes. And if you’ve gotten behind on the latter, the IRS provides various kinds of tax settlement options for you to avoid the former for your finances. Tax settlement occurs when those behind on their taxes reach a deal with the IRS in which they decrease their debt, extend their payment period or work out a new payment plan. There are two main categories of tax settlement options available: those that reduce the amount you owe, and those that do not. Here, I’ll outline the basic kinds of settlement and the pros and cons of each.
The first thing to do if you have not been filing your taxes for an extended period of time is to send the IRS an amended return. During the years you did not file your taxes, the IRS likely filed them for you, often times making incorrect and inflated assumptions in the place of facts. The amount you owe, until you send in an amended return, will be based on these filings and not the ‘true’ amount you may owe.
Settlement that reduces tax debt
After sending in an amended return, you should decide what form of “settlement” to apply for based on your situation. If you owe less than $25,000, it may be fine to apply yourself. Otherwise, you may need a certified tax specialist to help you out.
The three types of settlement that reduce the amount you will owe are offer in compromise, partial payment installment agreement, and penalty abatement.
Offer in compromise allows you to offer the IRS a lump sum of money you can pay today to wipe out all debt you owe. This is the most difficult settlement to reach; the IRS will only accept an offer which equals or exceeds the amount they think they could get from simply taking money forcibly from your bank account.
Partial installment agreements establish a new payment plan with the IRS that may or may not be for a lower amount than originally owed.
Penalty abatements do just as they say, they try to wipe away the money you owe in penalties for not paying your taxes, and is the easiest to arrange of the above options.
Settlement that does not reduce tax debt
These types of settlement include two options: installment agreements and financial hardship status.
Installment agreements are much like partial installment agreements except the amount of money you owe does not increase. Here, the IRS allows you to extend your payments through monthly installments as long as you can pay your debt in full in under three years.
Financial hardship is a status you can apply for if you need a temporary hold on your debt until your financial situation improves.
Jena is the Vice President of Marketing for the Undergraduate Consulting Club and a Kenan-Flagler Center for Sustainable Enterprise Fellow. As a CSE Fellow, Jena works to integrate sustainable principles throughout the business school through speakers, consulting engagements and the publication of the Sustainable Enterprise Quarterly, as well as several other initiatives. Jena also mentors high school students in Durham through Strive for College, an on-campus student organization which guides low-income students through the college application process.
Jena is from Keller, Texas and enjoys baking, working out, and reading books related to self-improvement and sustainable enterprise.