The Internal Revenue Service or IRS has developed several IRS tax settlement options which Vermont taxpayers can use to repay their outstanding IRS tax debt. Several of these tax settlement options may allow the Vermont taxpayer to settle their IRS debt for a fraction of the full amount of tax owed.
Vermont taxpayers who have not paid their IRS tax debt could face aggressive IRS collection actions such as wage garnishments, property repossession or bank account levies. IRS tax settlement options may allow the taxpayer to stop or avoid these actions and meet their tax obligations. Vermont taxpayers who are considering an IRS tax settlement option should contact a tax professional (tax attorney, enrolled agent, certified public accountant) for help.
Offer in Compromise
Offer in Compromise is one of the most popular IRS tax settlement options available. Offer in Compromise can be complicated, expensive and difficult to implement, but it can allow the Vermont taxpayer to settle tax debt at a fraction of the amount owed. Offer in Compromise allows the taxpayer to make a settlement offer to the Internal Revenue Service. The IRS has sole authority to accept or reject the offer. The IRS will only accept the OIC offer if the Vermont taxpayer meets certain requirements and the IRS has determined the taxpayer is unable to repay their tax debt with a lump sum payment or with an installment agreement.
If the OIC is accepted, the tax debt outlined in the OIC agreement will be considered settled, penalties and interest will stop accruing and tax collection efforts will cease. Unfortunately if the OIC is denied, the detailed financial records the IRS has collected can be used to continue collection actions against the Vermont taxpayer.
The IRS denies up to 80% of first time OIC offers, but negotiations may be allowed to find a compromise settlement offer which the government and the Vermont taxpayer can both accept. If negotiations are not allowed, the Vermont taxpayer can file a formal appeal within 30 days from the date of the OIC denial letter.
Qualifying for Offer in Compromise
The IRS will not accept all Vermont taxpayer’s OIC offers. The Vermont taxpayer’s debt must meet one of the following conditions:
- Doubt as to Liability- The Offer in Compromise may be accepted if the IRS believes the amount of tax debt which has been charged against the taxpayer may be inaccurate. Errors in tax debt are rare, but could occur if there has been a miscalculation, misapplication of tax law or if the Vermont taxpayer has new tax information which the IRS has not considered.
- Doubt as to Collectibility- Under this condition the amount of federal tax debt which was charged is not in question, only the ability of the IRS to collect the tax debt. This condition may also be used if the IRS has determined it is too expensive to collect the IRS tax debt.
- Effective Tax Administration- In some cases, payment of IRS tax debt may cause a hardship which is inequitable or unfair. Under these conditions, the IRS may be willing to accept an Offer in Compromise. This condition is used most often for the handicapped or elderly.
Vermont taxpayers must also complete the following Offer in Compromise tasks:
- All federal tax debt must be paid to the IRS by the federal tax deadline for the next five years.
- All Offer in Compromise payments must be paid by Vermont taxpayers.
- All Offer in Compromise forms and information must be sent to the Internal Revenue Service.
Most taxpayers who owe federal tax debt use an installment agreement to repay their debt. Unlike the Offer in Compromise, the installment agreement will require all IRS tax debt to be repaid, but it can be less complicated, time consuming and expensive to implement. The installment agreement will also allow the Vermont taxpayer to make monthly installment payments instead of having to make a lump sum payment. The IRS has established criteria to determine the amount of time allowed to repay the IRS tax debt.
Vermont taxpayers who owe $25,000 or less can generally qualify for an installment agreement. Vermont taxpayers who owe $25,000 or more should contact a tax professional to discuss the best options for repayment. Penalties and interest will continue to collect during the installment agreement, but collection actions will cease. If a taxpayer wants to save money, it is better to avoid an installment agreement and make a one time lump sum payment.
The Internal Revenue Service can cancel an installment agreement for any of the following reasons:
- The Vermont taxpayer fails to make an installment payment or pays less than the full payment amount. The IRS may be willing to grant a grace period of 30-60 days for first time offenders.
- The Vermont taxpayer does not file a federal tax return each year.
- The Vermont taxpayer’s finances substantially improve.
- The Vermont taxpayer misrepresents their financial information on the installment agreement application.
- Self-employed Vermont taxpayers fail to file quarterly federal tax returns or to pay their quarterly federal tax payments.
- The Vermont taxpayer does not pay their federal taxes for the five years before the IRS tax debt which can not be paid.
- The Vermont taxpayer has had another installment agreement within the last five years.
Partial Payment Installment Agreement
Vermont taxpayers who do not want to use an Offer in Compromise or who can not make full tax payments with an installment agreement may be able to qualify for a partial payment installment agreement or PPIA. Like the installment agreement, the PPIA will allow the taxpayer to make monthly installment payments, but unlike an installment agreement, the PPIA allows partial payments. The debt not outlined in the PPIA will be forgiven.
PPIA will not stop interest and penalties from accruing on all outstanding IRS tax debt, but it will stop the IRS from trying to collect the tax debt. Every two years the IRS will review the Vermont taxpayer’s PPIA to determine if it is still needed or if the taxpayer’s finances have improved enough to cancel or restructure the PPIA.
Currently Not Collectible
Some Vermont taxpayers may not be able to make any size tax payments or use an IRS tax settlement option to settle their federal tax debt. If the IRS decides to change a taxpayer’s tax status to currently not collectible, they will cease all collection actions against the taxpayer. Unfortunately, penalties and interest will continue to accrue on all outstanding tax debt.
Every year the IRS will send written notice to the Vermont taxpayer outlining the amount of tax debt which is owed. The letter is not considered a tax bill. The IRS has ten years to try to collect the tax debt before the statute of limitations will expire and the debt will be forgiven.
If a Vermont taxpayer has been fined penalties for a tax infraction such as failing to file a federal tax return, claiming a false refund or filing false financial information on a tax return, the IRS may be willing to lower or abate the penalties if a valid reason for the infraction is provided. Penalty abatement will be at the sole discretion of the IRS, but valid reasons could include: personal duress, incorrect professional tax advice or failing mental or physical health. The IRS may not be willing to lower all penalties. Vermont taxpayers who have penalties should contact a tax professional for help.