The IRS is a powerful agency; in fact, it is the most powerful collection agency in America. As such, when you find yourself owing back taxes, it can become a huge nightmare. Luckily, there are legitimate ways to resolve your federal back taxes that might even save you money. Learn more about these little-known programs offered by the IRS to help taxpayers get out from under their debt.
The IRS Files a Return For You — But You Can Fight It
When you do not submit a tax return but you are legally required to do so based on your income and filing status, the IRS does it for you. This is called a Substitute for Return (SFR). In most cases, the SFR leads to a person owing money — much more than they really should. This is because the IRS fills out the return based solely on the information they receive from your employers. This might not include the full picture of your income.
Plus, they do not include any deductions or credits beyond the standard deduction. This means that if you usually qualify for a certain credit or deduction to lower your tax bill, that will not be applied to your account. Adding to the bill is that the SFR is typically filed after the due date for the return, which means you will be hit with penalty fees for not paying and not filing. This quickly leads to you facing a massive tax bill due to your back taxes.
So, what do you do? You simply file your tax return. You have the right to file a return in place of the SFR. In many cases, when you fill out the return with all the applicable information, including credits and deductions, you end up owing significantly less money. This also lowers your penalty fees and interest, lowering your overall bill. Many people find that they do not owe any money at all and might even qualify for a refund! That is why filing a return is a smart first step to take when you find yourself owing federal tax debt due to your back taxes.
You Can Negotiate a Settlement
The bill you receive from the IRS does not always have to be the final say. There is a program in place called Offer in Compromise. With this program, you propose a payment to apply to your tax bill that is a lower amount that you will pay. If the IRS agrees, you pay it and then they forgive the rest. This might sound too good to be true, but it does exist. However, it is the hardest way to resolve your back taxes. This is because, despite more people getting approved, the IRS only accepts about 40 percent of the Offers in Compromise they receive.
An offer might get rejected for a lot of reasons. For one, any mistake on the form will lead to its rejection. You also must meet certain criteria. You must be compliant and up to date on filing all tax returns and not have any bankruptcy filings. The decision is based on three main components: doubt as to liability, doubt as to collectibility, and effective tax administration. Basically, the IRS approves the negotiated amount because they feel that it is the only money they will ever be able to get from you, even if they placed a lien or levy on your property.
Appeal the Decision
A bill from the IRS can be appealed. For example, if you are audited and it comes back stating you owe money, you have the right to appeal the decision before you are liable to pay the taxes. During an appeal process, you will be safe from any collective action. However, you might still find that your tax bill gets bigger, as it will continue to accrue penalty fees and interest. It might be worth doing anyway since if you get your original tax bill lowered or removed through the appeal, you will also find that you end up with fewer (or no) penalty fees and interest charges.
For many of the tax relief programs, especially Offer in Compromise, the IRS will always reject the initial negotiation. However, this does not mean you should stop. Rather, it means that it is time to appeal the decision or send in a second negotiation based on the feedback you receive from the RIS.
Get Rid of Your Penalty Fees
For many people with back taxes, the biggest issue with paying the bill comes not from the actual amount of taxes they owe but from the penalty fees. The IRS offers a program called Penalty Abatement that lets you get rid of the penalty fees, which might significantly lower your tax bill. Like the other tax relief programs offered, there are certain criteria you must meet in order to qualify for this program. However, it is the one with the easiest qualifications, especially for those for whom this is their first time owing taxes.
The main qualification for this program is that you had “reasonable cause” for being late on filing and/or paying your taxes. This “reasonable cause” could be any number of things, such as a death in the family, a significant illness, a natural disaster, or something else. However, it cannot be that you simply forgot to file or did not want to do so. You will have to prove your reasonable cause by providing documentation and other proof. The IRS has a program known as First Time Penalty Abatement that is offered for those who have not had any late payments or filing in the previous three years, are compliant with their taxes, and have paid or plan to pay the tax debt.
Pay It Off Over Time
If you do not qualify for any of the above programs for resolving your back taxes, you always have the choice to pay the tax off over time through an Installment Agreement. These are fairly easy to get, especially if you owe less than $50,000. In some cases, you can even negotiate your monthly payment and other components of the terms. You still will accrue interest and penalty fees, but it will be less than if you just did not pay. You also have to remain compliant with any future taxes or renegotiate your Installment Agreement to include future tax payments if you are unable to pay them right away.
The biggest secret behind resolving your IRS back taxes? That it can be done. There are several programs in place, including some not mentioned here such as Innocent Spouse Relief. When applying for these programs, it is essential that you fill out the forms completely accurately, or else you might find it rejected.
One thing that can really help improve your chances of success is to work with tax professionals. They have the knowledge of the tax code in order to know whether or not you meet the criteria, as well as with which program you will be most likely to have success. Plus, they have connections with IRS agents, making it easier to speed up the process. You do not have to worry about dealing with the IRS on your own; instead, you will have an expert working on your behalf with the IRS.
Qualify today for a Fresh Start.
Learn how easy it is to qualify for tax savings.
Qualify today for a Fresh Start
Learn how easy it is to qualify for tax savings.