If you find yourself owing money to the IRS, it’s important to know that you have options for resolving that tax debt. Three potential paths include having your debt placed in uncollectible status, setting up an installment agreement, or negotiating an offer in compromise. Here’s a breakdown of what each option includes and the key differences:
Uncollectible Status
The IRS can categorize certain tax debts as temporarily uncollectible based on a taxpayer’s financial situation and inability to pay. To qualify for uncollectible status, you must demonstrate that any payment towards the debt would create a hardship by not allowing you to meet necessary living expenses.
If approved, uncollectible status places your debt on hold. The IRS will temporarily cease active collection efforts, and penalties/interest are suspended. However, statutory interest continues to accrue, and the debt remains due in full.
Uncollectible status lasts for a defined period based on your financial records. Once that period expires or if your financial situation improves sufficiently, collection activity resumes unless the statute of limitations expires in the interim. This option doesn’t forgive the debt but provides temporary relief.
Installment Agreement
As the name implies, an IRS installment agreement is a payment plan that allows you to pay off your full tax liability through affordable monthly installments over time. To get on a plan, you must prove your current income and confirm your ability to make the scheduled payments.
Installment agreements include a setup fee and continue accruing penalties and interest until your balance is paid in full. However, the IRS won’t pursue further collection action so long as you honor the installment terms.
Negotiating the appropriate payment amount and duration based on your resources is flexible. Installment plans can provide taxpayers with an extended runway to fully pay what is owed.
Offer in Compromise
The Offer in Compromise option is an agreement with the IRS to pay less than the total amount of tax debt you owe. It is only approved in situations where the IRS doubts its ability to collect the entire outstanding balance.
To qualify, you must disclose all relevant financial information and demonstrate an inability to pay your debt in full based on income, assets, and expenses. The offer amount is based on your available resources to pay toward the tax liability. Certain fees also apply.
If accepted, an Offer in Compromise provides a path for settling your IRS debt at a reduced amount and avoiding further collections. It’s ideal when it does not appear you’ll ever be able to get up from under the debt, but it requires meeting strict criteria to participate.
These three options provide unique opportunities for resolving unpaid tax debts with the IRS. Depending on your circumstances, one path may prove more viable and advantageous than the others in resolving your financial situation. It’s essential to work with someone who understands your entire financial situation and can help you identify the option that will work best for you.
If you need help resolving your tax debt, schedule a call with me today.
