The economy in recent years has led to many Americans accumulating high amounts of debts. Inevitably, when someone is underwater with credit cards or home mortgages, they often get behind on taxes as well. This is especially prevalent with small businesses; owners often miss quarterly tax payments or fail to meet payroll. What many fail to realize is that when you fail to pay your employees, you are also personally liable for payroll taxes to the IRS.

If IRS tax debts are ignored, the problem only becomes worse. Penalties and interest accumulate, inflating the debt and making it even more difficult to repay. The IRS starts by sending friendly letters reminding you of the debt owed. But over time, if you ignore them, they shift to more drastic collection activity. Before you know it, you may be faced with wage garnishments, bank account levies, and liens on personal property. For this reason, it is always best to try to resolve your tax issues as soon as possible.

Tax Resolution Options: In recent years, the IRS has made it easier to qualify for its “Fresh Start” initiative, giving more taxpayers the opportunity to settle their debts for less than what is owed. Though it is still not easy to negotiate a settlement with the world’s largest collection agency, there are some viable options available. These include:

Offers in Compromise (OIC)

This is an offer by the taxpayer to pay less than the full amount owed to the IRS in exchange for cancellation of the debt. The IRS will only accept an OIC under three circumstances:

1. Doubt of Collectability: The IRS doubts that they could ever collect the full amount due from the taxpayer.
2. Doubt of Liability: The taxpayer does not believe that he/she is liable for part or all of the outstanding tax debt.
3. Effective Tax Administration: Taxpayer does not dispute liability for the debt or the ability of the IRS to collect the full amount. However, the taxpayer claims that paying the debt in full would cause an economic hardship. The IRS rarely accepts agreements on the basis of Effective Tax Administration.

Installment Agreements: If you are unable to pay your taxes in one lump sum, you may ask for a monthly installment agreement. Depending on your circumstances, the IRS may eliminate some or all of the penalties and interest to make your payments more affordable.

Currently not Collectible (CNC) Status: In extreme hardship cases, the taxpayer may request that the IRS move their account to CNC status. This is done by filing IRS Form 433-F or 433-A detailing income, assets and expenses and demonstrating the inability to pay the debt. CNC status will temporarily stop collection activity, put it does not necessarily wipe out the debt. The IRS may resume collection activity any time before the expiration of the statute (which runs 10 years) if they decide the taxpayer’s financial situation has improved.

Bankruptcy: Filing for bankruptcy can eliminate IRS tax debts under certain circumstances. However, this is a major step that would have serious long-term ramifications for you and your family and should only be considered if all other options are exhausted.

Owing back taxes to the IRS is definitely a serious matter, but not one that cannot be resolved if you understand your options. Before dealing with the IRS, always speak with BASC Expertise, your trusted Mesa accountant to discuss your specific circumstances and which option will be best to resolve your tax issues.