The federal government has given the Internal Revenue Service the authority to collect taxes to fund government activities. If Indiana taxpayers fail to pay their taxes the IRS has the ability to use a variety of aggressive tax collection actions such as wage garnishment, bank account levies and property repossession to collect IRS taxes.
The IRS has created a several IRS tax settlement options they can use to help taxpayers get current on their tax debt. The IRS may be willing to accept less than the full amount of tax owed if they believe it will allow Indiana taxpayers to pay their future tax liability. All Indiana taxpayers who owe the IRS back taxes can talk to a tax professional for information about all of their tax settlement options.
Offer in Compromise
Offer in Compromise or OIC is one of the most popular methods used by taxpayers to settle IRS tax debt. Offer in Compromise allows the Indiana taxpayer to make an offer to the IRS and if the IRS accepts the offer, all the debt outlined in the OIC will be settled when the Indiana taxpayer meets all the requirements of the Offer in Compromise agreement. Penalties and interest will continue to accumulate while the Offer in Compromise is under review by the IRS.
The IRS has sole authority to accept or deny all Offer in Compromise offers. Most OIC offers will be denied. The IRS may be willing to negotiate with the taxpayer until both parties are satisfied with the offer amount. OIC can be complicated, time consuming and expensive. The IRS will most likely need a large amount of detailed financial information to complete the OIC. If the Offer in Compromise is denied the IRS may have more than enough information to continue their collections of the tax debt, but for some, Offer in Compromise is a great way for some taxpayers to settle tax debt for a fraction of the amount owed.
Qualifying for Offer in Compromise
Not all Indiana residents will qualify for an Offer in Compromise. To qualify, a taxpayer must meet the following requirements:
- Doubt as to Liability- If the IRS believes the amount of tax assessed is incorrect due to a miscalculation or incomplete information they may be willing to accept an Offer in Compromise. This condition is seldom used.
- Doubt as to Collectibility- If the IRS believes it is unlikely they will be able to collect the Indiana taxpayer’s debt either now or in the future, they may be willing to accept an Offer in Compromise. Under this condition the amount of debt is not in question, only the ability of the IRS to collect the debt.
- Effective Tax Administration- Indiana taxpayers who can prove they would suffer “an economic hardship which is unfair and inequitable” if they paid their tax debt may qualify for an Offer in Compromise. The elderly and handicapped most frequently meet this condition.
Indiana taxpayers who apply for an Offer in Compromise must also complete the following:
- Indiana taxpayers must pay all of their Internal Revenue Service tax debt on or before the federal tax deadline for the next five years.
- Indiana taxpayers must meet all the requirements of the Offer in Compromise agreement.
- Indiana taxpayers must submit all of their IRS tax returns on or by the federal tax deadline.
Many Indiana taxpayers will not want to use an Offer in Compromise to settle their back debt. An installment agreement is another IRS tax settlement option available. An installment agreement allows the Indiana taxpayer to make monthly payments to pay all of their IRS tax debt. The IRS is generally willing to allow most taxpayers who owe $25,000 or less to pay the debt in installments. The debt must be paid within 60 months. Indiana taxpayers who owe more than $25,000 will want to consult with a tax professional that has experience negotiating installment agreements.
Penalties and interest will continue to accrue for all outstanding debt for the length of the installment period. It is always less costly to pay all tax debt immediately instead of using a protracted installment agreement. The IRS will suspend all collection activities during the installment agreement.
The Internal Revenue Service can terminate an installment agreement (IA) for any of the following reasons:
- The Indiana taxpayer does not pay all of their monthly tax payments.
- The Indiana taxpayer fails to file their federal tax returns.
- The Indiana taxpayer pays less than the required monthly installment payment amount. The IRS may give first time violators 30-60 days to meet the requirements of the IA.
- If the Indiana taxpayer’s financial condition substantially improves.
- If an Indiana taxpayer reports false financial information to the Internal Revenue Service during the installment agreement application process.
Indiana taxpayers who are applying for an installment agreement must meet all of the following requirements:
- All self-employed Indiana taxpayers must file quarterly tax returns and make quarterly tax payments.
- Indiana taxpayers must submit all of their tax returns each year.
- Indiana taxpayers must pay their federal taxes for the five years before the tax liability which can not be paid and is outlined in the installment agreement.
- Indiana taxpayers can not have made another installment agreement with the IRS within the previous five years.
- The IRS will review the Indiana’s taxpayer’s financial situation every two years.
Partial Payment Installment Agreement
Indiana taxpayers who do not want to use an OIC or who do not qualify for one may be able to settle tax debt with a partial payment installment agreement (PPIA). The PPIA differs from the installment agreement because partial instead of full monthly installments are made. If the IRS accepts the PPIA, debt which is not part of the agreement will be considered forgiven. Partial payment installment agreements can be less expensive and easier to implement than Offer in Compromise.
The IRS will stop all collection actions against the Indiana taxpayer during the PPIA, but penalties and interest will continue to accrue on the IRS tax debt. The IRS will review the PPIA every 2 years to determine if the PPIA can be altered or terminated.
Currently Not Collectible
Under certain conditions the IRS will determine that an Indiana taxpayer’s IRS debt is not collectible. If the IRS makes this determination, they will stop all debt collection efforts. Penalties and interest will continue to accrue while the debt is considered “currently not collectible”.
The Internal Revenue Service will send written notice to the Indiana taxpayer every year notifying the taxpayer of the existing debt. This notice is not considered a bill. If the IRS fails to collect the debt within ten years the statute of limitations will expire and the debt will be forgiven.
Penalties may be assessed against an Indiana taxpayer for a variety of reasons including: failing to pay IRS debt, failing to file a tax return or requesting a false refund. Under certain conditions the IRS may be willing to abate or reduce the penalties. Indiana taxpayers who are requesting penalty abatement need a valid reason. The IRS may not be willing to reduce or eliminate all penalties.