What to Do if You Can’t Pay Your Taxes, Part 2
In Part 1 of this series, we covered why failing to file a tax return is not your best option if you cannot pay your taxes, and introduced the first two of four possible alternatives: requesting a temporary delay of collection and arranging an installment payment plan. This post will cover two additional options: obtaining an Offer in Compromise and making an Innocent Spouse claim.
Offer in Compromise
An Offer in Compromise is just what it sounds like – it allows you to negotiate a lower amount to pay off your tax debt. You will be required to complete an application and provide detailed financial information about your current income, expenses, and assets (including your home and other real estate, vehicles, and bank accounts) and pay an application fee.
It is often advisable to enlist the aid of a qualified tax attorney to help you to apply for and negotiate the offer in compromise with the IRS, as there are several different grounds that will be considered for acceptance of your offer. These include a question about your liability for the claimed tax debt, the likelihood that the IRS will be able to collect the full amount from you, and/or if there is a financial hardship.
The IRS will often grant an offer in compromise if they believe the amount offered is the most that they will be able to collect from you within a reasonable amount of time. But your offer in compromise will only be considered if you are current with all tax filing requirements. If you are in bankruptcy, you will not be eligible for this option.
Your offer must include one of two proposed methods of payment: lump sum or periodic payments. The initial payment must be made with the application. For a lump sum payment, you must pay 20% of the total offer amount with your application, and then the remaining balance owed must be paid in no more than five additional payments. If your offer is for periodic payments, you will also submit your initial payment with the application and continue to pay monthly while your offer is being evaluated. If the IRS accepts your offer, you will continue to make the monthly payments until the entire amount is paid.
The IRS has low income certification guidelines, and taxpayers who meet those guidelines are not required to pay the application fee, initial monthly payments, or to pay in installments while the IRS reviews the offer.
The IRS will review your application and may file a Notice of Federal Tax Lien, but during the evaluation period, no other attempts to collect the amount can be made. The IRS must decide on your offer within two years of receiving it or it is automatically considered accepted.
If the IRS accepts your offer, you must meet all the terms included in the application you submitted, including making all payments and filing all returns. If a Federal Tax Lien was filed, it will remain in place until the amount is paid in full.
If your offer is rejected, you may appeal within 30 days by using the designated IRS form for this purpose.
Innocent Spouse Claims
Your fourth option if you cannot pay your taxes only arises if you file a joint tax return and you qualify as an “innocent spouse.” If you file a joint tax return, the IRS considers both spouses to be responsible for paying the taxes, and the IRS can collect 100% of the taxes owed from either spouse. But under the innocent spouse rules, one spouse may receive relief from paying penalties or additional taxes under certain circumstances (while the other spouse remains responsible for the full amount).
The IRS uses several different methods to determine whether a taxpayer qualifies for relief under the innocent spouse rules. First, if your spouse or former spouse did not report all of their income, reported improperly or claimed deductions or credits they were not entitled to, you may be able to reduce your tax liability if you can show that the improper amounts were solely due to the other spouse, that you signed the return with no knowledge that the tax was being underreported, and under the circumstances, it would be unfair to hold you responsible for those taxes.
You may also obtain relief if you are widowed, divorced, legally separated, or not living with your spouse when an item was reported improperly on a return without your knowledge (called separation of liability relief). If there are other reasons that do not fall strictly within the previous two categories that were generally attributed to your spouse, you may be entitled to equitable relief if the IRS finds that it would be unfair to hold you liable for the understatement or underpayment of tax. These might include instances of abuse or financial control. You must request relief under these rules within 2 years after the first date the IRS attempts to collect the tax from you.
Dealing with the IRS can be confusing and stressful. A qualified tax lawyer can help you develop a strategy if you are unable to pay your taxes. To find the perfect tax attorney for you, briefly describe your tax problem on our site and let attorneys come to you.
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