Taxpayers that cannot afford to pay their entire tax debt often believe that they cannot resolve their debt without making full payment. This leads them to wait to pay the taxes owed, which increases the tax debt amount that they need to pay because of the interest and penalties imposed the IRS.
Taxpayers that do not have the financial strength to pay the full amount of taxes owed can apply for one of the IRS tax debt reduction plans, namely Offer in Compromise, Partial Payment Installment Agreement or Currently Not Collectible. These plans are specifically designed to help taxpayers of different financial situations resolve their back tax.
Offer in Compromise (OIC) for Tax Debt Reduction
Even though Offer in Compromise has been misused by fraudulent tax services, it is a valuable plan for taxpayers that are looking for tax debt reduction so that they can resolve their back tax. Before applying for Offer in Compromise, ensure that you have no ability to pay the full tax debt amount. The IRS will consider your income from all sources, your asset equity and your expenses to judge your ability to pay. They will also consider whether you have the ability to take a loan to pay the tax debt.
If paying the full tax debt pushes a taxpayer into a financial crisis, then the IRS cannot force the taxpayer to pay the full amount. In such cases, they reduce the debt amount.
Partial Payment Installment Agreement (PPIA) for Tax Debt Reduction
PPIA allows taxpayers to pay a reduced amount of the tax debt in installments. Like the Offer in Compromise, to qualify for PPIA, the applicant must not have the financial capability to pay the entire debt. Before accepting a request for PPIA, the IRS will consider equity in assets, and if it is liable, will ask the taxpayer to use the equity in assets to pay the tax liability. If that is not possible, the IRS will reduce the tax debt amount.
A review of the income and expenses is conducted to consider the taxpayer’s the ability to pay the debt. If the applicant fulfills all the conditions, they can pay the reduced amount in installments over a fixed period of time.
Tax Debt Resolution through Currently Not Collectible (CNC)
Taxpayers that cannot pay any amount in tax debt can consider using Currently Not Collectible to resolve their back taxes. The IRS reviews the information regarding the income, assets and expenses. If they find that they cannot collect any amount in back taxes without pushing the taxpayer into a financial crisis, they will postpone collection of the debt.
It must be remembered that if the IRS sees an improvement in the financial condition of the taxpayer under CNC, they may collect a partial or the full amount of tax debt, depending on the particulars of the case.