Negotiating a tax settlement with the IRS can be a very difficult and confusing process if you have no experience doing so. There are several options for reducing the amount of your tax liability.
The first step is for you to determine your actual tax debt, if any. Remember, the IRS wants to collect the highest amount of taxes that the agency believes it is owed. It is up to you to determine if the IRS is correct and find your best option for repayment.
1. Determine What Your Tax Debt Is.
Just because the IRS says you owe a "certain amount" doesn't mean it is necessarily so. Examine all correspondence from the IRS. If you received a letter from the IRS disputing your filed tax return, or if you received a notice from the IRS stating that you failed to file a tax return and they calculated your taxes for you, it is imperative that you assess your tax debt.
2. Retain a tax professional.
If a tax professional prepared your original tax return, contact them to discuss the IRS’s concern. They may be able to provide a quick response to the IRS or handle the matter as part of their original tax preparation service. If you prepared your own taxes, you should still consider retaining a tax professional. An experienced tax professional may be able to quickly assess whether the IRS is correct and if there are any other ways that you could reduce your tax debt, such as filing an amended tax return.
If you choose to "go it alone" and handle the negotiation yourself and you dispute some or all of the IRS’s calculations, respond to the IRS within the time frame set forth in their letter or notice. If you have unfiled tax returns, you will be required to first file a tax return and file a petition in tax court.
If the IRS sent you a notice proposing changes to your tax return, you can dispute these changes in a letter that includes: a statement that you disagree with the IRS’ proposed changes; the basis for your disagreement; any documentation supporting your position; and the control number or unique identifier that the IRS assigned to your case. It is imperative that you respond to the IRS in the manner that they specify in their correspondence to you and within the time frame they set forth. Failure to do so may result in additional penalties.
If you discover an error in your previous tax returns that shows that the IRS owes you money, you should file an amended tax return, Form 1040X as quickly as possible. Typically, you must file your claim for credit/refund within 3 years after the date that you filed the original tax return or within 2 years after you paid taxes to the IRS based on the original tax return. If the IRS accepts the amended tax return, they can reduce your current tax liability by the amount that you are now owed under the amended tax returns.
If the IRS has created an tax debt via a "Substitute for Return," the IRS will have the authority to file tax liens and to order a tax levy. Consequently, you need to focus on rectifying this problem or you could lose your paycheck.
5.Submitting an Offer in Compromise -Determine if you should submit an offer in compromise.
You should consider submitting an Offer in Compromise if you have limited funds and assets and you are unable to repay your IRS debt within the time frame granted under the IRS Collection Statute, i.e., 10 years from the date the tax was assessed. It isn't difficult to meet the criteria of an offer in compromise if you have limited assets and limited disposable income. A successful Offer in Compromise requires a complicated asset and equity determination. If you don’t meet the requirements for an offer in compromise, setting up an installment agreement and paying off what you owe in smaller amounts over time may be a good option.
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The IRS may agree to settle your tax debt for less than the amount you owe if you qualify for its Offer in Compromise program. When you apply for an Offer in Compromise, you must do the following:
1.File all tax returns that you are legally obligated to file.
2.Make estimated tax payments for the current tax year.
3. If you’re a business owner with employees, you must file federal tax deposits for the current quarter.
You are ineligible to file for an Offer in Compromise if:
1. You or your business is in an open bankruptcy proceeding.
2. You have the financial resources to pay your owed taxes in a lump sum or through a payment plan.
You really should consider hiring an experienced tax professional to assist you with the offer in compromise if you really want to be successful. It can be a confusing and difficult process without professional assistance.
In order to apply for an Offer in Compromise (#taxsettlement), you need to do the following:
a. Complete and file IRS Form 656, Offer in Compromise.
b. If you’re self-employed or a wage earner, complete and submit IRS Form 433-A.
c. If you are filing for your business, complete and submit IRS Form 433-B.
d. Submit a $186 application fee, unless you can certify that your income is at or below 250% of the Department of Health and Human Services poverty guidelines.
e. Submit an initial offer of payment, unless you can certify that your income is at or below 250% of the Department of Health and Human Services poverty guidelines.
Yourconversation with our San Diego tax professionals will take 20 to 30 minutes to complete. At the conclusion of our consultation, you will know if submitting an Offer in Compromise is "right way to go."