Virginia taxpayers may be able to settle IRS tax debt for a fraction of the amount owed with an IRS tax settlement option. The IRS has been tasked with not only collecting federal tax debt but also determining how much they will be willing to accept to settle tax debt.
Virginia taxpayers who do not pay their federal taxes may face aggressive collection actions from the IRS. The IRS frequently uses wage garnishments, property repossession and bank account levies to compel Virginia taxpayers to meet their tax obligations. Virginia taxpayers who owe IRS tax debt should not wait for the IRS to contact them but should instead call a tax professional (certified public accountant, tax attorney or enrolled agent) for help.
Offer in Compromise
The IRS has created several IRS tax settlement options to help taxpayers settle IRS tax debt. Offer in Compromise is one of the most popular of these programs. Offer in Compromise allows Virginia taxpayers to make a settlement offer to the IRS. The IRS can accept or deny the offer. If the Offer in Compromise is accepted penalties and interest stop accruing and the IRS cease all collection actions. After the Virginia taxpayer meets their Offer in Compromise requirements, the IRS tax debt which is part of the OIC will be settled.
Up to 80% of Offer in Compromise first time offers may be denied, but the IRS may be willing to negotiate with the Virginia taxpayer if they believe it may help the taxpayer meet their future tax obligations. If the Offer in Compromise is denied or negotiations fail, the Virginia taxpayer will not have any legal recourse against the IRS.
The Offer in Compromise can allow tax debt to be settled for a fraction of the full amount owed, but it can be time consuming, expensive and difficult to implement. The IRS will also need detailed financial information to complete the OIC evaluation and if the OIC is not accepted, the IRS may use the OIC information to continue debt collection. Virginia taxpayers who need more information about an Offer in Compromise should contact a tax professional.
Qualifying for Offer in Compromise
Virginia taxpayers who want an Offer in Compromise must meet one of the following conditions:
- Doubt as to Liability- If there is doubt about the amount of tax debt which has been assessed against a Virginia taxpayer the IRS may be willing to accept an Offer in Compromise. Errors are not common, but they can occur if the IRS misapplies tax law, miscalculates tax debt or if the taxpayer produces tax information which has not been previously considered.
- Doubt as to Collectibility- Under this condition, the amount of tax debt is not in question only the ability of the IRS to collect the IRS debt within the statutory collection period. The IRS may also accept an Offer in Compromise if the cost to collect the debt is too high.
- Effective Tax Administration- Virginia taxpayers who may suffer a hardship which may be “inequitable or unfair” may qualify for an Offer in Compromise. This condition is most frequently used for the elderly or the handicapped.
Virginia taxpayers must complete the following tasks:
- Virginia taxpayers must pay their federal tax debt before the tax deadline for the next five years.
- Virginia taxpayers must meet their Offer in Compromise requirements.
- Virginia taxpayers must send their IRS tax returns on or before the federal tax deadline.
Installment agreements are the most common IRS tax settlement options used to repay IRS tax debt. Installment agreements allow the Virginia taxpayer to pay their tax debt in monthly installment payments. The time the IRS allows for debt repayment can change based on the amount of debt owed.
Virginia taxpayers who owe $25,000 or less can contact the IRS and apply for an installment agreement. Virginia taxpayers who owe more than $25,000 or more may want to contact a tax professional who has experience negotiating installment agreements with the IRS. Installment agreements stop all IRS collection actions against the taxpayer, but interest and penalties will continue to accrue on all outstanding tax debt.
Installment agreements will always cost the Virginia taxpayer more money than paying tax debt in a lump sum payment. The IRS has the authority to cancel all installment agreements if the taxpayer does not meet all of the installment agreement requirements. Virginia taxpayers who do any of the following may have their installment agreement cancelled.
- Fail to pay the full installment agreement payment or pay less than the total amount owed. First time violators may be granted a 30-60 day grace period.
- Fail to file their federal tax returns each year by the federal tax deadline.
- If the Virginia taxpayer’s financial condition substantially improves.
- Falsifying financial information on the installment agreement application.
- If self-employed Virginia taxpayers fail to send federal tax returns and estimated tax payments to the IRS each quarter.
- Fail to make IRS tax payments for the 5 years before the federal tax debt which can not be paid.
- If Virginia taxpayers have had another installment agreement within the last 5 years.
Partial Payment Installment Agreement
Virginia taxpayers who can not qualify for an Offer in Compromise or who can not make the full installment agreement payments each month may qualify for a partial payment installment agreement (PPIA). The PPIA will allow the Virginia taxpayer to make partial monthly installment payments. The debt which the IRS agrees is not part of the partial payment installment agreement will be forgiven.
The partial payment installment agreement will not stop interest and penalties from accumulating, but the IRS will stop their collection efforts. Every two years the IRS will review the Virginia taxpayer’s financial tax status and if it has substantially improved, the PPIA may be modified or cancelled.
Currently Not Collectible
Virginia taxpayers who can not pay their IRS tax payments may have their tax debt declared as “currently not collectible”. Currently not collectible debt status will stop all IRS tax collection efforts, but penalties and interest will continue to collect on the outstanding IRS tax debt.
The IRS will send a letter each year documenting the full amount of tax debt owed, but the letter is not considered a tax bill. The Internal Revenue Service has ten years to try to collect the Virginia taxpayer’s IRS tax debt before the statute of limitations expires and the debt is forgiven.
Virginia taxpayers can be charged penalties for failing to file their federal tax returns, claiming a false refund, not paying their federal taxes or falsifying tax information. The IRS may be wiling to lower or abate penalties if the Virginia taxpayer can provide a valid reason for the tax infraction. Infractions can occur for a variety of reasons including: personal duress, poor mental or physical health, or incorrect tax professional advice. The IRS may not be willing to lower or abate all tax penalties. The Virginia taxpayer who needs help negotiating with the IRS should contact a tax professional.