Here are 5 options that many taxpayers choose to use to resolve back taxes:
1. Bankruptcy: Did you know that Chapter 7 Bankruptcy may completely wipe clean your back IRS and state tax debts? There are a lot of rules you have to follow to make it work and it doesn't apply in every case, but it is an option you could consider. If it seems like bankruptcy won't solve the entire problem, consider using one of the following negotiation techniques.
PROS: A judge is in control, not the IRS.
CONS: You really only want to file bankruptcy if it is your last resort, and it may not take care of the entire problem.
2. Installment agreement: An Installment Agreement can be very beneficial to someone that owes money to the IRS but has fallen on hard times. It’s a program that lets taxpayers pay their tax debt in monthly payments; either for the full amount owed, or a partial amount.
You have to be current with your tax return filing. Also, you have to be prepared to tell the IRS your financial story in a light that shows you really can’t afford to pay much. It’s not just a simple case of filling out a form; you also need to know how to negotiate with the IRS.
PROS: Gets the IRS off your back and stops levies. The IRS statute of limitations to collect on the debt gets closer to expiration.
CONS: Takes work to get into a good agreement. If your ability to pay decreases, you will likely have to renegotiate.
3. Offer In Compromise: It is an IRS defines tool that allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.
When the IRS reviews your case to determine if they are willing to accept your offer, they will take the following factors into consideration: your ability to pay, your income, your expenses, and your asset equity.
PROS: It really works. You really can settle for less than what you owe. Sometimes substantially so!
CONS: Requires the utmost skill and persuasion to achieve acceptance and get the optimal offer amount.
4. Currently Non-Collectable Status: This is a great temporary solution that can wind up being a long term solution. The IRS agrees to suspend any collection activity, because of a low potential to collect.
PROS: The IRS statute of limitations to collect on the debt gets closer to expiring. All levies stop.
CONS: IRS can change its mind at any time and ask taxpayer to prove they still don't have an ability to pay. Lien could be issued.
5. Penalty Abatement: Penalty abatement can lowers penalties on your back taxes owed when the IRS finds that you had a reasonable explanation for incurring the debt.
PROS: The IRS will really lower your debts.
CONS: Penalties are typically not so high that an abatement would make monumental difference. Also, the debt needs to be paid in full, or close to being paid in full for abatement to have any meaningful impact. When you present your case to the IRS it needs to be buttoned up tight to make them believe your explanation reasonable.
