The Internal Revenue Service or IRS as part of the Department of Treasury has the authority to collect federal taxes to fund the activities of the federal government. If taxpayers refuse to pay their taxes the IRS can compel them to pay with several aggressive collection methods including: repossessing business or property assets, freezing money in taxpayer’s accounts, garnishing wages or imprisonment.
South Dakota taxpayers who owe IRS tax debt may be able to stop these aggressive debt collection tactics by using an IRS tax settlement option. Under certain circumstances the IRS may be willing to negotiate a tax settlement if the IRS believes it will help South Dakota taxpayers meet their future tax obligations.
South Dakota taxpayers can contact a tax professional (enrolled agent, certified public accountant or tax attorney) who can provide information to them about their IRS tax settlement options.
Offer in Compromise
Offer in Compromise or OIC is one method South Carolina taxpayers can use to pay IRS tax debt. OIC will allow South Dakota taxpayers to offer a sum of money to settle all IRS tax debt. If the IRS accepts the offer, all penalties and interest will stop accumulating and the IRS will stop all tax collection actions. Offer in Compromise may allow South Dakota taxpayers to pay less than the full amount of tax owed.
The Internal Revenue Service does not accept all OIC offers. In fact, up to 80% of first time OIC offers may be rejected. The IRS may be willing to negotiate until an offer is found which is acceptable to both the federal government and the South Dakota taxpayer.
Offer in Compromise can be complicated, difficult to implement and expensive. The IRS will need detailed financial records to determine if they will accept the OIC. If they reject the OIC offer, they may be able to use the data they have gathered to continue debt collection. Offer in Compromise may be one way to settle tax debt for less than the full amount of money owed, but it may not be the best option for all South Dakota taxpayers.
Qualifying for Offer in Compromise
Not everyone who applies for an Offer in Compromise will qualify for one. Offer in Compromise will only be accepted if the South Dakota taxpayer meets one of the following:
- Doubt as to Liability- If there is doubt as to the amount of tax debt owed the IRS may be willing to accept an Offer in Compromise. This does not occur often, but discrepancies can occur if the IRS makes a miscalculation or if they misinterpret tax law.
- 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 debt. The IRS may also accept an OIC if they determine the cost of debt collection is too high.
- Effective Tax Administration- If paying IRS tax debt causes a South Dakota taxpayer to suffer a hardship which is inequitable or unfair the IRS may accept an Offer in Compromise. This condition is mainly used for the handicapped or the elderly.
South Dakota taxpayers must also complete the following tasks:
- South Dakota taxpayers must pay all of their future federal tax debt on time for the next 5 years.
- South Dakota taxpayers must meet their Offer in Compromise requirements.
- South Dakota taxpayers must submit their federal tax returns before the federal tax deadline.
The most common method used by taxpayers to repay tax debt is an installment agreement. Installment agreements allow the South Dakota taxpayer to pay their IRS tax debt in small manageable monthly installment payments. Generally it is not too difficult for taxpayers to qualify for an installment agreement if they owe $25,000 or less in IRS tax debt. South Dakota taxpayers who owe more than $25,000 in tax debt should contact a tax professional for help negotiating with the IRS.
Installment agreements will not stop penalties and interest from accruing, but they will stop the IRS from collecting the tax debt. It will always be less expensive for South Dakota taxpayers to pay all tax debt with a lump sum payment and avoid an installment agreement.
The Internal Revenue Service can revoke or refuse the installment agreement if the South Dakota taxpayer:
- Fails to file all future tax returns or pay their federal tax obligations after the installment agreement is accepted
- If their financial status substantially improves. The IRS may review the installment agreement every two years.
- Fails to make all of the required installment agreement payments or makes only partial payments. The IRS may give first time violators 30-60 days before the installment agreement is revoked.
- Reports false financial information on the installment agreement application.
- Fails to pay their tax debt for the five years before the tax liability which can not be paid.
- If they have had another installment agreement with the IRS in the last 5 years.
- Fails to complete all past federal tax returns for all past tax liability.
- If a self-employed South Dakota worker fails to file quarterly tax returns or make quarterly tax payments.
Partial Payment Installment Agreement
If a South Dakota taxpayer can not qualify for an OIC or if they can not make their full tax payments with an installment agreement, they may qualify for a partial payment installment agreement (PPIA). PPIA is similar to an installment agreement and will allow the taxpayer to make monthly installments, but a PPIA allows the South Dakota taxpayer to make partial payments. If the debt is not included in the PPIA it will be forgiven.
PPIA can be less expensive and less time consuming than an Offer in Compromise. PPIA will not stop penalties and interest from continuing to accumulate, but it will stop all IRS debt collection efforts. PPIA will always cost the taxpayer more money than repaying the IRS tax debt with a one time lump sum payment. The IRS will review the PPIA every two years, and if the South Dakota taxpayer’s financial position has substantially improved, the IRS has the right to increase the PPIA payments or terminate the PPIA plan.
Currently Not Collectible
South Dakota taxpayers who absolutely can not pay their tax debt may have the debt declared “currently not collectible”. Under this status change the IRS will cease all collection actions. Penalties and interest will, however, continue to accumulate.
The IRS will send a written letter every year to the South Dakota taxpayer outlining the amount of IRS tax debt owed. This statement is not considered a tax bill. If the IRS fails to collect the tax debt within 10 years the statute of limitations will expire, and the IRS tax debt will be forgiven.
The IRS may assess penalties against a South Dakota taxpayer if they do not file their tax return, fail to pay their IRS taxes, file a false refund or misrepresent their financial status. If the South Dakota taxpayer has a valid reason for their mistake and can prove a willingness to repay their tax debt, the IRS may be willing to lower or abate the tax penalties. Valid reasons for mistakes could include: a serious mental or physical health condition, a personal hardship which made it difficult to file a tax return, personal duress, a natural disaster or bad tax advice from a tax professional