In most cases, the IRS expects all taxpayers to pay “their fair share” of taxes owed. This means that the IRS wants taxpayers to fully pay all the taxes required by law on time.
However, there are tens of millions of taxpayers that owe the IRS billions of dollars in past due taxes, penalties and interest.
Because of the staggering amount of penalties and interest the IRS adds on to delinquent tax bills, many taxpayers that fall behind for whatever reason will find themselves quickly in a deep financial hole and will be unable to pay their way out.
For example, paying $1,000 in tax one day late results in a $5 penalty (½ of 1%), while filing a tax return with $1,000 in tax due one day late results in a $50 penalty (5%).
These penalties are cumulative and “cap out” at 25% each. Thus, a taxpayer filing a return, with a balance due of $1,000 five months late will have a 22.5% failure to file penalty and a 2.5% failure to pay penalty (rates may change under certain circumstances) for a total of 25% in penalties or $250. This of course, does not include interest (currently 3% compounded daily).
Suffice it to say, these numbers pile up quickly and without full payment remitted, most taxpayers in these situations will find themselves assigned to the IRS’ collection department.
Generally speaking, IRS collection will demand that delinquent taxpayers enter into monthly installment payment agreements against their past due taxes while remaining current with ongoing taxes.
Many times these agreements can go on for years, and because penalties and interest will continue to be piled on over the course of those years, taxpayers will pay and pay and pay with a negligible reduction in the amount owed.
However, there are two alternatives taxpayers can utilize to get out from under this debt. First, the IRS has the authority under Internal Revenue Code § 7122 to settle back tax debts. This type of settlement is commonly referred to as an Offer in Compromise (OIC).
There are very specific, complex rules that must be following prior to the acceptance of an OIC by the IRS and many taxpayers will not qualify. Thus, be very, very careful before you send money to a company that boasts that it can easy settle IRS tax debts for pennies on the dollar.
For example, in order to qualify for an OIC the taxpayers must have filed all required tax returns. The taxpayers are required to submit detailed financial information, and the amount of the offer is based on the information contained in that submission.
In most cases, it will not matter how much delinquent tax, penalty and interest is owed. Generally, the amount of the offer must equal at least 80% of the net equity of all the assets of the taxpayer, plus the taxpayers’ net monthly surplus income times either 12 or 24 (the multiplier). The multiplier used depends on how fast the taxpayers are going to pay the offer amount.
If the IRS accepts the taxpayers offer, the unpaid past tax debts are forgiven with a few strings attached. Some of those strings include a five year future good behavior requirement and that the IRS will keep any tax refund due from the year in which the IRS accepts the offer. For example, if the IRS accepts the offer in the calendar year 2013, the 2013 refund (payable in 2014) will be kept by the IRS.
The second alternative for IRS tax relief is bankruptcy. Filing a bankruptcy petition can be an extremely effective way to deal with the IRS.
Generally, income taxes are dischargeable in bankruptcy, meaning they can be erased, if the bankruptcy case is timed correctly. This is very, very crucial. If the bankruptcy case is filed too soon, then a tremendous opportunity to “hit a home run” and wipe out all the taxpayers’ debts could be lost for many years or forever.
The bankruptcy court is also a great place to challenge IRS tax assessments as long as they have not been determined by another court.
Finally, once a taxpayer files a bankruptcy petition the IRS must step back and abide by the filing. That means that the IRS, in most cases, must cease all collection action until the bankruptcy case is discharged from the court.
For more detailed information on IRS tax relief, call the Winspear Law Group for a free consultation.