Which Option Should You Use to Settle Your Tax Debt?

Choosing the wrong option to settle your tax debt can be a very costly error. If you apply for an installment agreement, when you could have eliminated some of your debt with an Offer in Compromise, it could end up costing you thousands, and you can’t expect the IRS to notify you of your alternative settlement options. They will simply accept your payments, while you are forced to take on debt or deal with other financial difficulties in order to pay off your tax debt.

There are several options available to settle your tax debt. While this is by no means an exhaustive list, many taxpayers will be able to use one or more of these methods to reach a tax debt settlement.

Installment Agreements

The IRS would generally prefer that you apply for an installment agreement because while they don’t get all of the back taxes at once, you do agree to pay off the full amount over time. This option is appropriate when you have no arguments to dispute the tax debt, no defenses for why you can’t pay the tax debt, and your financial situation does not justify an Offer in Compromise.

Offer in Compromise (OIC)

If you have a financial situation that provides you with little disposal income, and your situation is unlikely to change in the near future, you may be able to submit an OIC. For example, a retired person with a fixed income, few assets, and reasonable living expenses who is unable to pay off their tax debt can argue that their financial situation is not going to change, so the IRS should agree to compromise the debt.

When the taxpayer is eligible and this strategy is used correctly, it can wipe away tens of thousands of dollars in tax debt.

Tax Bankruptcy

Tax debt may be discharged in bankruptcy, provided that the debt is old enough and other requirements are met. However, a Chapter 7 or Chapter 13 bankruptcy is not right for everyone, and the taxpayer’s entire financial situation needs to be considered, rather than filing a bankruptcy strictly to eliminate tax debt.

For example, a Chapter 7 bankruptcy will require the debtor to liquidate all of their assets that are not protected by bankruptcy exemptions. Many Chapter 7 debtors have no nonexempt assets, and can eliminate unsecured debt, along with certain types of tax debt, without distributing anything to their unsecured creditors. However, a debtor with significant nonexempt assets may not want to file a Chapter 7 bankruptcy just to eliminate their tax debt because they will have to surrender their assets to do so. In addition, the IRS tax lien will continue to attach to exempt assets even if the taxes are dischargeable.  If your bankruptcy attorney believes that your taxes will be discharged make sure he gives you his opinion in writing.

Other Options for Tax Debt Relief

Many other tax strategies can be used in conjunction with the methods listed above or on their own. Placing your account in currently not collectible status will put a temporary stop to IRS collections, but does nothing to actually settle your debt. First time penalty abatement can be used to eliminate penalties and interest on the penalties, but you will stay have to deal with the underlying tax liability.

To learn about the strategies that will help you resolve your tax problems and get the best possible settlement, contact an experienced tax settlement lawyer.