The Internal Revenue Service or IRS has created IRS tax settlement options to help taxpayers pay their excessive federal tax debt. Several of the tax settlement options may allow South Carolina taxpayers to settle their IRS tax debt for a fraction of the full amount owed.
South Carolina taxpayers who are facing wage garnishments, repossessions or bank account levies may have options to stop these aggressive IRS collection tactics. South Carolina taxpayers can contact a tax professional such as an enrolled agent, tax attorney or certified public accountant for help. Tax professionals can answer their questions about available tax settlement options and which option might be best to settle IRS tax debt.
Offer in Compromise
South Carolina taxpayers have a variety of IRS tax settlement options, but Offer in Compromise or OIC is one of the most popular. OIC allows the South Carolina taxpayer to send an OIC offer to the IRS and if the IRS accepts the offer, the tax debt outlined in the Offer in Compromise will be settled (after the taxpayer meets all of the OIC requirements). Penalties and interest will stop accruing and all collection actions against the South Carolina taxpayer will cease if the Offer in Compromise is accepted.
The IRS will reject most Offer in Compromise offers, in fact 80% of first time offers will be rejected. The IRS may however, be willing to negotiation with the taxpayer if they do not think the taxpayer can pay the tax debt in one lump sum payment or with an installment agreement. If the IRS refuses to negotiate, the taxpayer may be able to file a formal appeal.
The OIC may allow the South Carolina taxpayer to settle their IRS tax debt for a fraction of the total cost, but the downside is the IRS will request detailed information for the Offer in Compromise and if the OIC is denied this information may be used to continue collection efforts against the taxpayer. The OIC can also be costly and time consuming. While Offer in Compromise is a popular tax settlement option, it may not be the right one for all South Carolina taxpayers.
Qualifying for Offer in Compromise
An Offer in Compromise will only be accepted if the South Carolina taxpayer’s debt meets one of the following conditions:
- Doubt as to Liability- The amount of assessed tax debt may be incorrect. Errors are infrequent, but they can occur through miscalculations, misinterpretation of tax laws or if the taxpayer has tax information which has not been analyzed. This condition is not frequently used.
- Doubt as to Collectibility- The IRS may accept an OIC if they believe they will not be able to collect the IRS tax debt before the deadline expires. The IRS also may accept an OIC under this condition if they have decided the cost of collecting the outstanding debt is too high.
- Effective Tax Administration- If the South Carolina taxpayer may experience an inequitable or unfair hardship as a result of paying their outstanding tax debt the IRS may accept an Offer in Compromise. The elderly and the handicapped most frequently use this condition.
South Carolina taxpayers must also meet the following Offer in Compromise requirements:
- They must pay their IRS debt before the federal deadline for the next five years.
- All of the OIC requirements must be met and all payments made.
- All federal tax forms and Offer in Compromise documents must be sent to the IRS.
Installment agreements are the most popular method used to pay outstanding tax debt. Installment agreements or IA allows the taxpayer to repay their tax debt in monthly installment payments. This payment method can be less costly and less difficult to use than Offer in Compromise. The amount of time allowed to repay the IRS debt can vary depending on the amount of federal taxes owed by the South Carolina taxpayer.
If the South Carolina taxpayer owes $25,000 or less in outstanding tax debt, the IRS generally will accept an installment agreement. Taxpayers who owe more than $25,000 in outstanding IRS tax debt should contact a tax professional who can help negotiate the installment agreement with the most favorable repayment terms.
The installment agreement will not stop penalties and interest from accruing, but it will stop the IRS from continuing to try to collect outstanding tax debt. Installment agreements will always cost the taxpayer more money than paying the IRS tax debt in one lump sum. The installment agreement may be cancelled by the IRS for many reasons:
- Not paying the full installment payment or missing payments. First time violators may be granted a 30-60 day grace period.
- Not filing a federal tax return each year.
- If the South Carolina taxpayer’s finances dramatically improves.
- Providing inaccurate financial information on the installment agreement application.
- If self-employed South Carolina taxpayers do not file their federal tax returns or pay their estimated tax payments each quarter.
- If the taxpayer does not make their IRS tax payments for the 5 years before the tax debt which can not be paid.
- If the South Carolina taxpayer had another installment agreement in the previous five years.
Partial Payment Installment Agreement
South Carolina taxpayers who can not afford to pay the full amount of the IRS tax debt with an installment agreement may qualify for a partial payment installment agreement or PPIA. PPIA is similar to the installment agreement and will let the taxpayer pay monthly payments, but the payment amount will only be for part of the tax debt owed. The remainder of the tax debt not outlined in the PPIA will be considered settled.
The PPIA will not stop interest and penalties from continuing to accrue on the outstanding tax debt, but will stop all IRS collection efforts. The IRS will review the South Carolina taxpayer’s finances every two years and if their finances have substantially improved, the IRS has the authority to increase the PPIA payment amount or cancel the PPIA.
Currently Not Collectible
South Carolina taxpayers who can not pay their IRS tax debt may have their tax status changed to currently not collectible. Interest and penalties will continue to collect on the outstanding tax debt but the Internal Revenue Service will cease all collection efforts.
The IRS will send a written notice to the South Carolina taxpayer each year. The notice will document the total amount of outstanding debt, but is for information purposes only and is not considered a tax bill. The IRS will have 10 years to collect the IRS tax debt before the statute of limitations expires.
The IRS can assess penalties for a variety of tax infractions including: not filing a tax return, providing false information, requesting a false refund or not paying federal taxes. South Carolina taxpayers who have penalties may, with a valid reason, be able to convince the IRS to lower or abate their penalties. Valid reasons might include: ill health, incorrect tax advice from a tax professional, involvement in a natural disaster or personal duress. The Internal Revenue Service has the authority to determine what penalties will be abated.