Know Possible Tax Solutions:
Penalties and Interest Abatement:
Penalties for filing and paying late may be abated if you have reasonable cause and the failure was not due to willful neglect. Generally, interest charges cannot be abated. They continue to accrue until all assessed taxes, penalties, and interest are paid in full.
Installment Payment Plans:
An Installment Agreement with the IRS means that you will be allowed to make periodic payments over time (maximum of 72 months) in order to pay off your tax bill obligations.
To be eligible for an Installment Agreement, you must file all required tax returns and otherwise be in compliance. Prior to approving your Installment Agreement request, the IRS may request a Collection Information Statement (Form 433F, 433-A and/or Form 433-B) to provide proof of your financial status. This is typically required if you owe amounts greater than $50,000.
An Offer in Compromise:
You may be eligible for an Offer in Compromise if you can’t pay the amount you owe in full or through installments. By requesting an Offer in Compromise, you’re asking to settle unpaid taxes for less than the full amount you owe. There are three different types:
- Doubt as to Liability: Your tax debt may not be accurate.
- Doubt as to Collectability: You have insufficient assets and income to pay the amount due.
- Effective Tax Administration: Because of your exceptional circumstances, paying the amount due would cause an economic hardship or would be unjust.
If you owe past due federal taxes that you cannot pay, bankruptcy may be an option.
When you file for Chapter 7 bankruptcy, typically all income tax debts are discharged or you are not responsible for them if they are not recent (previous year) -- but other taxes may remain like payroll taxes and trust fund taxes. Basically you liquidate non-exempt assets (or assets without a tax lien attached) to satisfy some or all of your back taxes. Whatever is left after the liquidation of assets you are typically not responsible for.
With a Chapter 13 bankruptcy (more popular), some of your back taxes can be discharged but usually they have to be repaid with a payment plan usually over 3-5 years. If your income is less than the state median income, you will get a 5 year payment plan otherwise it is normally 3 years. It is common though even with a tax payment plan that you will end up paying less than you owe. Back taxes related to unfiled or late returns cannot be discharged, nor can penalties under current law in most situations.