Dear Consumer Ed:
Can you negotiate or lower the amount of taxes that you owe the IRS, or are the companies that claim they can do this not legit?
Consumer Ed says:
Yes, in certain, limited cases you can arrange to pay tax debts through a payment plan (called an installment agreement) or settle outstanding tax debts for less than what you actually owe (called an offer in compromise or OIC). However, in order to apply for these programs with the Internal Revenue Service (IRS) or the Georgia Department of Revenue (GDOR) you must first explore all other payment options. Even if you qualify, strict requirements and restrictions apply. This week's column will delve into this subject as to the IRS and federal taxes; next week, we'll take up the Georgia aspects.
First, please remember that firms that claim they can negotiate to lower your tax debt may or may not actually be able to do so, because depending on your particular circumstances, you may or may not qualify for the federal or state OIC program. In fact, most taxpayers do not qualify. Of 59,000 taxpayers who applied for a federal OIC in 2011, only 20,000 were approved by the IRS-that's less than 34%! So you should investigate tax service companies and the services they claim to provide carefully before signing up. Taxpayers looking for a tax service to resolve their tax debt can easily be taken advantage of by fraudulent companies.
If you owe taxes, the worst thing you can do is nothing. The problem will not go away! Interest and penalties on back taxes will continue to accrue and the IRS may begin its collection process. Instead, carefully consider your payment options and take action!
The Internal Revenue Service and Federal Tax Debts
Your federal tax liability typically depends on how much income you earn as well as applicable adjustments, deductions, exemptions, and credits for which you may qualify. Taxes are assessed on taxable income based on a progressive tax rate, under which generally the more you earn, the higher your tax rate. If you don't pay your tax debt on time, the IRS begins collection action. IRS Publication 594 (Pub. 594) outlines the IRS collection process and options if you can't pay your tax debt in full, including applying for an installment agreement or an offer in compromise.
Federal Installment Agreements
If you can't pay your debt in full at one time, Pub. 594 indicates applying for an Installment Agreement may be an option. It's a payment plan that allows you to make smaller, periodic payments to pay off your tax debt over a period of time. According to the IRS Installment Agreements webpage, before you apply you must: (1) file all required tax returns; (2) consider other financial sources to pay your tax debt in full to save money (even under an installment agreement the IRS will continue to charge applicable interest and penalties until you pay the amount due in full); (3) determine the largest monthly payment you can make; and (4) know that your future refunds will be applied to your tax debt until it is paid in full. For more information and to learn how to apply, visit the IRS Installment Agreements webpage.
Federal Offers in Compromise
An Offer in Compromise is a request to settle your unpaid tax debt for less than the full amount owed. Pub. 594 says an OIC may be a legitimate option if the IRS agrees your assessed tax debt may not be accurate, if you have insufficient assets and income to pay your tax debt in full, or if paying the full tax debt would cause extreme financial hardship. The IRS will consider your ability to pay, income, expenses and assets to decide if you qualify. However, there are important restrictions and requirements. You aren't eligible if you can pay your tax debt in a lump sum or in installment payments or if you are in an open bankruptcy proceeding. Also, to be eligible you must (1) file all tax returns you are legally required to file, (2) make all required estimated tax payments for the current year, (3) and make all required federal tax deposits for the current quarter if you are a business owner with employees.
You can apply for an OIC directly with the IRS. The IRS provides an Offer in Compromise Pre-Qualifieron its website to help you determine your eligibility and to assist you in preparing a preliminary OIC proposal. For more information and for step by step instructions on how to apply, visit the IRS OIC webpage and refer to IRS Form 656B (Offer in Compromise Booklet).
If you owe federal taxes, below are resources that may be helpful as you assess your options:
- IRS Publication 594 - IRS Collection Process
- Understand IRS Collection videos (IRS instructional videos for those who owe taxes)
- Understanding Your IRS Notice or Letter
- Online Payment - Installment Agreement Application (if you owe $50,000 or less)
- IRS Form 9465 - Installment Agreement Request (if you owe $50,000 or less)
- IRS Form 433-F - Collection Information Statement (if you owe more than $50,000)
- IRS Offer in Compromise Pre-Qualifier
- IRS Form 656B - Offer in Compromise Booklet
- IRS Form 656L - Offer in Compromise Doubt as to Liability (if you have a legitimate doubt that you owe part or all of the tax debt you were assessed)
If you need help with a tax problem and can't afford to hire a tax professional, you may qualify to receive help from the Taxpayer Advocate Service or a Low Income Taxpayer Clinic:
- Taxpayer Advocate Service (TAS) is an independent organization within the IRS offering free help if: you have a tax problem you haven't been able to resolve yourself, your problems are causing financial difficulties for you or your business, you face an immediate threat of an adverse collection action by the IRS, or you've tried repeatedly to contact the IRS but no one has responded. For more information, visit the TAS website.
- Low Income Taxpayer Clinics (LITC) can often represent low income taxpayers in disputes with the IRS or in court on audits, tax collection disputes and other tax issues for free or for a small fee. You may qualify for help from an LITC if you are a low income taxpayer or if you speak English as a second language and need help understanding your taxpayer rights and responsibilities. To learn more, visit the LITC webpage.