Tax season can be really tough. Especially if you owe a lot of money to the IRS and you cannot afford to pay your taxes, you put a lot at stake. The IRS has the right to claim your property, vehicles and bank accounts and if you do not cooperate you face even the possibility of doing jail time. On the other hand, the IRS is cordially willing to work with you if you prove that you are financially incapable of meeting your obligations as soon as possible. The sooner you explain your situation, the better solution you will be offered, but most importantly you will avoid the harsh consequences of tax legislation for those who fail to pay their taxes on April 15.
In fact, the IRS can offer you two options to help settle you tax debt:
a) Installment Payment Plan
The IRS offers you the option of Installment Payment Plan to make payments on the taxes you owe. With an Installment Payment Plan you can arrange to make monthly payments on a fixed date that is convenient to you, anytime between the 1st and 28th of the month. Moreover, you can choose the exact amount that you afford to pay and you should at least make that minimum monthly payment.
To be eligible for an Installment Payment Plan you should owe $25,000 or less in combined tax, penalties, and interests. In that case, you need to submit Form 9465 Installment Agreement Request to the IRS or go online and use the Online Payment Agreement (OPA). If your combined tax, penalties, and interest debt exceeds $25,000, you need to submit Form 433F Collection Information Statement. In both cases, the IRS takes approximately 30 days to respond to your request.
Keep in mind that you are very likely to be approved for an Installment Payment Plan if:
(1) your total tax does not exceed $10,000
(2) the minimum monthly payments you decide will pay your debt in full in 3 years
Also, the IRS charges several fees for setting up an Installment Payment Plan that range between $43 and $105. You may also be eligible for fee discount if you agree for minimum monthly payments to be directly withdrawn from your bank account or if you are a low-income taxpayer.
If the IRS approves you for an Installment Payment Plan, minimum monthly payments can be made by credit card, check, money order or automatic withdrawal from your bank account.
b) Offer in Compromise (OIC)
The Offer in Compromise (OIC) is a settlement for a lump-sum payment of a lesser amount than the total amount of taxes you owe.
To be eligible for an Offer in Compromise you should:
(1) Not be in a process of bankruptcy
(2) Include a signed Form 656-A Income Certification for Offer in Compromise Application Fee and Payment OR a lump sum offer of 20% payment OR the first installment.
If you don’t include the Form 656-A, include $150 application fee.
If you approved for an Offer in Compromise you basically agree to make the lump-sum payment to the IRS and pay your taxes strictly on time for the next five years. Also the IRS has the right to keep any tax refunds, payments, and credits that you were eligible to prior to submitting your Offer in Compromise as well as during the calendar year that you were approved for an OIC.
The IRS approves an Offer in Compromise in three stages:
(1) one to four months for preparing documentation
(2) thirteen to eighteen months for processing documentation
(3) one to three months to finalize Offer and Making Payment Arrangements
On average, it takes a little bit over a year (380 days) to process an Offer in Compromise application. However, the problem is that the IRS does not approve too many Offer in Compromise each year. In contrast, most of the cases are declined. The IRS calculates your taxpayer’s reasonable collection potential (RCP). RCP represents your ability to pay based on the value of certain assets including your property, vehicles, bank accounts, and estimated future income minus your basic living expenses. If the amount you offer as an Offer in Compromise is not equal or greater than the RCP, the IRS declines your OIC.
In conclusion, both options offered by the IRS can save you some time and facilitate your payments on the taxes you owe. However, the best case scenario is to make a full payment on your debt as soon as possible in order to minimize or even eliminate the interest charges and penalties for any delay. Although the Installment Payment Plan is set up for minimum monthly payment, the IRS allows you to make higher payments if you can afford to. So, take advantage of this option to pay off your debt as soon as possible. On the other hand, if you cannot afford to pay more than the minimum monthly payments, an installment agreement seems like a reasonable payment option for resolving your tax debt issue.
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