first things first:
CALLING ALL TAX RETURNS
This one is number one for a reason. Very little can be done in the way of clearing up your tax problems until all of your returns are prepared, filed, and accepted.
In at least 75% of our tax counseling cases clients are not “fully compliant”. This means that in addition to having unpaid taxes, they have unfiled tax returns. Getting your IRS problems behind you cannot proceed in a rational way before the full extent of the problems are known. Wage garnishments or bank account levies may be lifted prior to getting all returns filed but the IRS quickly puts them back in place if you fail to follow through on filing all required returns.
If you have very simple returns you may be able to prepare and file them yourself with Turbotax or other popular online solutions.
If there are complexities, uncertainties, or questions about your unfiled returns you should consider outside help. Including estimates in older tax returns is sometimes unavoidable. An experienced tax adviser can provide valuable insight. These returns can be subjected to extremely close scrutiny when a taxpayer is seeking an IRS debt compromise. It’s important to get them right.
If you feel like you’re qualified to get your back filings caught up, pick a tool and get going. Millions use these online products with great results. For more complex returns consider using a CPA or lawyer, particularly in circumstances where significant tax debt already exists. But whether you prepare and file these back returns yourself, or hire Maui Tax Counseling to help: the time to act is now. One thing to remember about back taxes you owe: The situation never gets better if you ignore it. Quite the opposite.
will your financial situation qualify you to file for tax debt forgiveness?
That can be a very tricky question. When deciding whether to allow a “compromise” (forgiveness) of your tax debt the IRS primarily considers two things: Net worth and disposable income. How much are your cars worth? Do you have home equity? Retirement accounts? Money? How much do you spend on housing? Food? Healthcare? How much money do you make? How much money will you make in the future. IRS Form 656 and the related 433 series seek a significant amount of information about your finances and your employment and your business if you have one. IRS auditors use this information to decide whether to grant debt compromise.
The above paragraph should give you the idea of what’s going on here. You may have heard the old IRS joke about a simplified tax form: How much did you make? Send it to us.
The IRS wants its money. If there is some way for you to pay them, like selling your house, borrowing money, or cashing in your retirement accounts, that’s what you’re going to have to do. You have to answer a lot of questions, gather a lot of information, and produce a lot of documents in order to prove you can’t pay.
IRS debt forgiveness is rare. Extremely rare. Out the approximately 10 million delinquent tax payers, less than 25 thousand received Offer in Compromise debt forgiveness in 2018. This puts the average chance at 3 in 1,000. A statistic you won’t see on a “tax debt relief” site. Look at the numbers yourself.
The OID eligibility calculator on the IRS website can give you an idea if you’re a candidate for tax debt compromise. But the calculator is only as good as the numbers you develop and generally those numbers contain estimates.
After taking a close look at your finances you will either be eligible to:
File an OIC. (unlikely)
Pursue penalty abatement and an Installment Agreement. (most likely)
Qualify for special relief due to extraordinary circumstances under “Effective Tax Administration” rules. (highly unlikely)
If you enter into payment agreements with the IRS and fail to file any future tax return IRS can (and will) cancel the agreements, and in the case of an OIC they will reinstate debt previously forgiven.
Filing an Offer in compromise
Completing an Offer in Compromise filing on Form 656 on your own is generally not a good idea. Not many people without the necessary training and experience can successfully fill one of these things out properly. The biggest problem is that you’ll have a lot of questions. And you won’t be able to get answers to all of them on the web that you are comfortable with. Tax professionals are available to prepare and file these forms for you but for the most part we won’t “check your work.”
As discussed elsewhere, the majority (3 out of 5) OICs that do get filed are rejected by the IRS, leaving taxpayers back at square one after having spent $5 to $10 thousand . Rejections of properly prepared and evaluated OICs are rare. Taxpayers preparing filings containing estimates frequently make assumptions colored by their personal interests. While this is perfectly understandable, IRS auditors don’t share those interests, and taxpayers frequently work at cross purposes to their own debt relief goals. Hiring a professional is strongly recommended if you are a candidate for filing and Offer in Compromise.
Installment Agreement with penalty abatements and other solutions like innocent spouse relief.
At the end of the day these types of solutions are where most tax debt relief efforts generally end up. In most cases the IRS will automatically grant Installment Agreements for terms of up to 6 years. Interest amounts are statutory (not subject to negotiation) If you owe more than $50,000, the payback terms are frequently extended.
Most penalty forgiveness is based on objective matters of fact. A look at the IRS regulations regarding the removal of penalty assessments would lead you to believe that penalty abatement is a fairly straightforward process. It is. Most of the situations for penalty abatement are clear cut. Some skill is involved in properly communicating with IRS to maximize your chances for penalty abatement, but for the most part, penalties are forgiven based on rules, not the arguments of your consultant. Don’t be charmed by claims that tax relief companies are chocked full of ex-IRS agents. Ex-IRS agents generally don’t know anything more about IRS rules and procedures than any CPA or lawyer who regularly practices in these areas. You may not know those rules but like all common tax matters, you can read them on the IRS website.