The Internal Revenue Service (IRS) has been given the authority by the federal government not only to collect taxes to fund government activities, but if necessary, to settle federal tax debt for less than the full amount owed. The IRS may be willing to negotiate a tax settlement if they believe the negotiations will allow the Iowa taxpayer to meet all future tax liability. Iowa taxpayers who owe IRS back taxes may have tax settlement options to eliminate the aggressive tactics of the IRS.
Iowa taxpayers who are interested in an IRS tax settlement option can contact a tax professional such as an enrolled agent, certified public accountant or tax attorney.
Offer in Compromise
Offer in Compromise or OIC is used by many Iowa taxpayers to settle IRS tax debt. Offer in Compromise allows the Iowa taxpayer to make an offer to the IRS for generally less than the full amount owed. If the IRS accepts the offer, it is considered a compromise settlement and the amount outlined in the OIC will be settled. Penalties and interest continue to accrue until the OIC is accepted.
The Internal Revenue Service will not accept all offers. Negotiations and appeals may be necessary to help all parties find an OIC amount which is acceptable. Offer in Compromise can be complicated and expensive. The IRS may request large amounts of detailed financial data which can be used to continue debt collection if the Offer in Compromise offer is denied. Offer in Compromise is one of several IRS tax settlement options and it may not be the best option for all Iowa taxpayers.
Qualifying for Offer in Compromise
Iowa taxpayers must prove one of the following conditions for the IRS to consider accepting the Offer in Compromise offer:
• Doubt as to Liability- This condition assumes there might be a discrepancy in the amount of debt calculated. This can occur if the IRS made a calculation error or if the taxpayer has new information concerning their debt. This condition is seldom used.
• Doubt as to Collectibility- Under this condition there is not a question about the amount of tax debt owed, only the ability of the IRS to collect the debt.
• Effective Tax Administration- If an Iowa taxpayer can prove that paying their tax debt could cause “an economic hardship which is unfair and inequitable” they may qualify for an Offer in Compromise. The elderly and handicapped most frequently meet this condition.
Iowa taxpayers applying for an Offer in Compromise must also complete the following:
• Iowa taxpayers must pay all of their IRS tax debt on or before the federal tax deadline for the next 5 years.
• All Offer in Compromise requirements must be paid by the Iowa taxpayer.
• Iowa taxpayers must submit all of their Internal Revenue Service tax returns on or by the federal tax deadline.
Iowa taxpayers who do not qualify for an Offer in Compromise or who want an IRS tax settlement plan which is less time consuming or less expensive can use an installment agreement. With an installment agreement, the Iowa taxpayer makes monthly installment payments to repay all of their tax debt. Iowa taxpayers who owe $25,000 or less in tax liability may be able to use an installment agreement to pay their outstanding tax debt within 60 months. Iowa taxpayers who owe more than $25,000 should contact a tax professional to discuss the best option for settling their IRS debt. The IRS will stop their collection efforts during the installment agreement, but interest and penalties will continue to accrue. To reduce the amount of taxes paid, it is always best to pay all tax debt in one lump sum payment.
The IRS can revoke an installment agreement (IA) for any of the following reasons:
• The Iowa taxpayer fails to make all of their monthly tax payments.
• The Iowa taxpayer does not file their tax returns.
• The Iowa taxpayer pays less than the required monthly payment amount. The IRS may give first time violators 30-60 days to make payments.
• The Iowa taxpayer’s financial condition substantially improves.
• False or inaccurate financial information was provided to the Internal Revenue Service by the Iowa taxpayer during the installment agreement application process.
Iowa taxpayers who are applying for an IA must meet all of the following requirements:
• All self-employed Iowa taxpayers must file quarterly federal tax returns and make quarterly tax payments.
• Iowa taxpayers must submit all of their federal tax returns.
• Iowa taxpayers must pay their federal tax debt for the 5 years before the tax liability which can not be paid.
• Iowa taxpayers can not have made another installment agreement with the Internal Revenue Service within the last 5 years.
• The Internal Revenue Service will review the Iowa taxpayer’s financial situation every 2 years.
Partial Payment Installment Agreement
Another popular method to settle IRS tax debt is the partial payment installment agreement (PPIA). The PPIA allows Iowa taxpayers who can not pay all of their IRS debt to make partial monthly installment payments. If the IRS accepts the PPIA plan, all debt not paid will be forgiven. Many Iowa taxpayers choose the PPIA over the Offer in Compromise because it can be less complicated, less expensive and less time consuming.
One benefit of the PPIA is that the IRS will cease all collection efforts including: wage garnishment, bank levies, and repossessions. Penalties and interest will continue to accrue during the payment period. The partial payment installment agreement will be reviewed every two years by the IRS to determine if the taxpayer’s financial situation has changed. The IRS may increase the Iowa taxpayer’s monthly payments or completely cancel the PPIA.
Currently Not Collectible
If the IRS determines that an Iowa taxpayer’s debt is not collectible they may change the debt status to “currently not collectible”. Under this status, debt collection efforts will cease. The IRS will send written notification each year to the Iowa taxpayer detailing the amount of tax debt owed. This notification is not considered a tax bill. If the IRS fails to collect the debt within 10 years, the collection time will expire and the IRS tax debt will be forgiven.
The IRS may fine tax penalties to an Iowa taxpayer for a series of tax infractions including: not filing a tax returning, reporting incorrect tax data, or requesting a false refund. There may be a valid reason for the error and if this is the case, the IRS may be willing to reduce or eliminate the penalty. Valid reasons could include: false information from a tax professional, deteriorating mental or physical health, or natural disasters. The IRS may not be willing to lower or dismiss all penalties. A tax professional can help evaluate penalties and negotiate penalty abatement with the IRS.