I receive a lot of questions from worried taxpayers about tax debt and what they can do to help solve their tax problems. While tax debt is intimidating, especially with the IRS involved, it doesn’t have to consume your life. The IRS does provide ways to settle your tax debt. Let’s look at a few of the ways I advise San Francisco taxpayers to address their tax problems and get out from under their tax debt.
One option to settle tax debt is through an Offer of Compromise (OIC). An OIC allows a taxpayer to settle their IRS debt for less than the full amount they owe. This is a legitimate option for taxpayers that face financial hardship if they are forced to pay their full tax liability. The IRS looks at a set of facts and circumstances to determine if you’re eligible for an OIC. These include: ability to pay, income, expenses, and asset equity. When the amount you offer represents the most the IRS can expect to collect within a reasonable period of time, you will generally be offered an OIC.
You are eligible to apply for an OIC if you filed all required tax returns and made all required estimated payments, are not in an open bankruptcy proceeding, and you must have a valid extension for a current year return (if applying for the current year). Additionally, if you’re an employer, you must have made tax deposits for the current and past two quarters before you apply for an OIC. Applying includes completing a Form 433-A (individuals) or 433-B (businesses), as well as submitting all required supporting documentation. If you are a corporation or LLC/LLP, you must also submit Form 656. There is also a non-refundable $205 application fee and the IRS requires you submit a non-refundable initial payment.
If a taxpayer does not qualify for an OIC, penalty abatement is a great way to reduce the liability. The IRS will continue to attempt collection of the tax you owe, but it may be willing to waive or reduce the penalty charges if you can show you have a good reason. Penalty abatements have a low risk, with a high level of reward and no financial analysis required.
Unfortunately, you can never abate and reduce the interest amount. However, the interest amount is calculated based upon the tax and penalties due. Therefore if you reduce the tax or the penalties amount, you will be reducing the interest due.
The process of applying for an OIC or penalty abatement can be tricky. It’s best to work with an experienced San Francisco tax professional or tax attorney to make sure you apply correctly and have the best chance of receiving the right tax debt settlement plan from the IRS.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of EDD, IRS, tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
