Rhode Island taxpayers with outstanding IRS tax debt may be able to use an IRS tax settlement option to pay their tax debt for a fraction of the full amount owed. The Internal Revenue Service (IRS) has been tasked by the federal government not only to collect taxes, but to determine how much they are willing to accept to settle outstanding IRS tax debt.
Rhode Island taxpayers who refuse to pay their tax debt may face a variety of extremely aggressive IRS collection actions including: wage garnishments, bank account levies or property repossession. It is never a good idea to ignore the IRS. Rhode Island taxpayers who need more information about IRS tax settlement options can contact a tax professional such as a tax attorney, certified public accountant or enrolled agent.
Offer in Compromise
There are a variety of IRS tax settlement options available to Rhode Island taxpayers, but Offer in Compromise or OIC is one of the most popular. Rhode Island taxpayers can use OIC to make a settlement offer to the IRS to pay their outstanding tax debt. If the IRS accepts the offer, the IRS tax debt outlined in the OIC agreement will be settled. If an Offer in Compromise is accepted, penalties and interest will stop accruing. The IRS will also stop all of their collection actions.
Offer in Compromise can be a good option to help Rhode Island taxpayers settle their IRS debt for a fraction of the full amount owed, but it can be complicated and expensive. In addition, the IRS will need large amounts of detailed information to process the OIC offer and if the offer is not accepted, this information can be used to continue tax collection efforts.
Up to 80% of OIC offers are rejected after the initial offer is made, but the IRS may be willing to accept the offer after continued negotiations or on appeal. The IRS will only accept the Offer in Compromise if the Rhode Island taxpayer meets certain requirements and the IRS does not believe the tax debt can be paid in one lump sum payment or with an installment agreement.
Qualifying for Offer in Compromise
Not all OIC offers will be accepted. The Rhode Island taxpayer’s debt must meet one of the following conditions:
- Doubt as to Liability- The IRS may accept an Offer in Compromise if there is some doubt as to the amount of tax debt which is owed. Errors are uncommon, but they could occur if a tax miscalculation was made, the agent misinterpreted tax laws or if there is additional tax information which the taxpayer can provide.
- Doubt as to Collectibility- Under this condition the amount of IRS tax debt is not in question, only the ability of the Internal Revenue Service to collect the tax debt. The IRS also will analyze the cost of debt collection and if it is too high, they may decide to accept an Offer in Compromise.
- Effective Tax Administration- If a Rhode Island taxpayer may suffer a hardship which is “inequitable or unfair” by paying their IRS tax debt, the IRS may accept an Offer in Compromise. This condition is most frequently used by the elderly and the handicapped.
The following Offer in Compromise tasks must also be completed:
- Rhode Island taxpayers must pay their IRS tax debt before the federal deadline for the next 5 years.
- Rhode Island taxpayers must make the required Offer in Compromise payments.
- Rhode Island taxpayers must submit all the required federal tax forms and OIC documents to the IRS.
The most popular IRS settlement option is the installment agreement. The installment agreement will not allow the taxpayer to settle tax debt for less than the full amount owed, but it will allow the taxpayer to pay their tax debt in monthly installment payments. Installment agreements can be less expensive and less difficult to implement than an Offer in Compromise. The time allowed to repay tax debt will vary depending on the amount of IRS tax debt owed.
Installment agreements for tax debt of $25,000 or less are fairly easy to negotiate. If the Rhode Island taxpayer owes more than $25,000, they may want to discuss their installment agreement with a tax professional that has experience negotiating with the Internal Revenue Service.
Penalties and interest will not stop accumulating during the installment period, but the IRS will stop their debt collection efforts. It will always cost less for the Rhode Island taxpayer to make their IRS tax payment in one lump sum and avoid an installment agreement if possible. The IRS has the authority to cancel or terminate an installment agreement for a variety of reasons:
- Missing installment payments or failing to pay the full amount. The IRS may be willing to grant a grace period of 30-60 days for first time offenders.
- Failing to file a tax return each year.
- If the Rhode Island taxpayer’s finances improve substantially.
- The Rhode Island taxpayer misrepresents their financial position while applying for an installment agreement.
- If self-employed Rhode Island taxpayers fail to submit quarterly tax returns or fail to make quarterly tax payments.
- If the Rhode Island taxpayer fails to pay their taxes for the five previous year before the IRS tax debt which can not be paid.
- If the Rhode Island taxpayer has had another installment agreement within the prior five years.
Partial Payment Installment Agreement
Not all Rhode Island taxpayers will qualify for an installment agreement or Offer in Compromise. The partial payment installment agreement or PPIA may be another IRS tax settlement option. The PPIA, like the installment agreement, will allow Rhode Island taxpayers the ability to pay their tax debt in monthly installments, but the taxpayer will only have to pay part of the full tax debt. The tax debt which is not included in the PPIA will be forgiven by the IRS.
Penalties and interest will continue to accumulate on all of the outstanding IRS tax debt, but the Internal Revenue Service will stop their collection actions. Rhode Island taxpayers who qualify for a PPIA will have to provide financial evidence every two years to the IRS for review. If after review, the IRS determines the taxpayer’s finances have improved, the PPIA can be cancelled or the payment terms modified.
Currently Not Collectible
There may be certain Rhode Island taxpayers who are unable to use any IRS tax settlement options to repay their tax debt. Under certain conditions the IRS may determine their tax debt is currently not collectible. If a taxpayer’s taxes are changed to the currently not collectible tax status, penalties and interest will continue to accrue, but the IRS will cease all collection actions.
Every year the Rhode Island taxpayer will receive notification from the IRS concerning their outstanding tax debt. This notice is not considered a tax bill. If the Internal Revenue Service fails to collect the IRS tax debt before the statute of limitations expires (10 years) the debt will be forgiven.
Rhode Island taxpayers can be assessed penalties if they fail to file a tax return, fail to pay their IRS tax debt, misrepresent their financial information on their tax return, or request a false refund. There may be valid reasons for certain tax infractions such as: personal duress, mental or physical health ailments, the victim of natural disasters or incorrect information from tax professionals. Taxpayers who have excessive penalties or who want information about penalty abatement should contact a tax professional. The IRS may not be willing or able to abate or lower all penalties.