There are a myriad of tax resolution methods that tax professionals can use to help their clients on the state, local, and federal level. Tax agencies provide a variety of these tax resolution methods because they actually do want taxpayers to resolve their tax debt. We’ve compiled a list of the most commonly used tax resolution methods so you can decide which options will be best for your clients:
Under an installment agreement, the taxpayer agrees to pay the entire amount of their debt in monthly installments over a period of up to six years. This method allows the taxpayer to pay in small, manageable amounts so that the debt is not overwhelming. Once the tax debt is paid in full, the IRS will release the federal tax lien imposed on the taxpayer.
Partial Pay Installment Agreement
A partial pay installment agreement is the same as a regular installment agreement, except that it allows taxpayers to pay lower monthly payments than they would in a standard installment agreement. If the taxpayer’s financial situation does not change, then they will continue to pay reduced monthly payments until the expiration of the statute of limitations (generally, for 10 years). After the statute expires, the IRS can no longer collect on the debt and the taxpayer will be free of their monthly tax payments. If you do qualify, you will be subject to a thorough financial review every two years. Based on theIRS’ findings, it has the discretion to increase your payments if you have had an increase in income.
Currently Not Collectible
A taxpayer can have all collection activity halted if they are under “Currently Not Collectible” status. This status is only for taxpayers whose expenses exceed their income. The IRS will look at national standards in order to determine if the taxpayer could afford their basic living expenses.
Innocent spouse relief can be used when one spouse of a joint return is assessed additional tax based on the erroneous filing by the other spouse. This method can be extremely complex and usually involves the assistance of a tax attorney, but can be a viable option depending on the circumstances.
Offer in Compromise
An OIC allows a taxpayer to pay a lesser amount to satisfy the entire tax debt. During the approval process, the IRS investigates a taxpayer’s financial situation and compares the taxpayer’s entire tax debt to their current financial status. If accepted into the OIC program, the taxpayer will be subject to continuous review of their financial status to ensure that they cannot afford to make larger tax payments.
Oftentimes, tax debt can be mostly resolved by simply filing past due returns. The IRS generally imposes penalties and interest on tax due from missing returns, so unless you submit a penalty abatement, those will still likely have to be paid. It is also entirely possible that your client might even be entitled to a refund that they have missed out on due to missing returns. The only way to find out is by simply gathering their financial documents for that year and filing the past due returns.
The IRS, and many state agencies, allow penalty abatement requests for penalties imposed on a tax debt. Many penalties can be staggering amounts, so the tax agency will occasionally reduce or remove those penalties for good cause.
Statute of Limitations
Generally, the statute of limitations for the IRS to collect past-due tax is 10 years after the IRS has assessed of a tax liability. This method is rarely effective because the IRS will still likely take collection through a tax lien and/or levy. The only circumstance in which this might (possibly) work is if the taxpayer has no assets, wages, or property that the IRS can go after for the entire length of the 10 years.
This list is not comprehensive, but covers the key areas of tax resolution that a tax professional can implement into their tax practice. The appropriate tax resolution method depends on your client and their particular situation. Evaluate each option thoroughly before moving forward so your clients can receive the best tax resolution possible.
Learn more about adding tax resolution to your practice by download our free ebook “How to Start Offering Tax Resolution.”