If you’re struggling to pay off tax debt, it may seem like the IRS is completely arbitrary as it determines your repayment options and whether you qualify for any tax relief.
When considering your ability to repay, the IRS’ Collection Financial Standards (CFS) is used to determine a taxpayer’s living expenses. In addition to considering the taxpayer’s age and family size, the IRS uses a set of National Standards that assigns a set monetary value to five types of necessary household expenses, which scales up depending on family size:
There are also national standards for out-of-pocket health care expenses and public transportation, local standards for housing and utility costs, and, for vehicle-owning taxpayers, transportation standards.
Some necessary household expenses aren’t subject to the Collection Financial Standards, including taxes paid, childcare, court-ordered payments (i.e., alimony, child support, etc.), and premiums for health insurance and life insurance.
For taxpayers more than 120 days in arrears, the IRS allows you to make other arrangements, depending on your financial status. These arrangements could involve a repayment plan or a hardship agreement, such as an Offer in Compromise (OIC), where the taxpayer settles a tax debt for less than the amount owed. Depending on your financial situation, you may be eligible for an installment agreement or an OIC.
An Installment Agreement is a payment plan between you and the IRS to pay your back taxes and penalties over an extended time frame (longer than 120 days). You can apply for an installment agreement if you:
In November 2020, the IRS announced its Taxpayer Relief Initiative for taxpayers struggling to meet their tax burdens because of the COVID-19 pandemic. Highlights of the new initiative include:
An Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS to settle a tax debt for less than the amount owed. To begin the OIC process, you must submit an application and present the IRS with an offer for the amount you can pay toward your outstanding tax debt. But, before you do that, you must:
If you meet all the eligibility requirements listed above, you can visit the IRS’ Offer in Compromise Pre-Qualifier to confirm your eligibility and start preparing a proposal offer. You must also submit the following forms:
RELATED: I was turned down for an Offer in Compromise I filed on my own. Is there any help for me?
The IRS will examine your ability to pay based on your income, expenses, and assets. You won’t qualify for an OIC if, after reviewing your financial situation, the IRS determines you can fully repay your tax debt, either through an Installment Agreement or equity in assets.
When considering your ability to pay, there are certain assets that the IRS can exclude from consideration, such as up to $1,000 of a bank balance or $3,450 against the value of a vehicle.
An experienced tax attorney can help you prepare your application to the IRS.
If you meet the threshold requirements listed above, the IRS will generally take about a month to determine whether you qualify. If you do, your offer will be assigned to an OIC examiner. The examiner will consider everything in your application and determine your reasonable collection potential (RCP).
The reasonable collection potential includes the value of your assets, including real estate, cars, bank accounts, and other property. The RCP also considers anticipated future income (taking into consideration your age and ability to work) minus certain amounts of money set aside for basic living expenses.
You should expect the OIC process to take at least six months — possibly longer if you decide to dispute the examiner’s findings or appeal a rejection.
If you’re struggling with outstanding tax liabilities and would like to learn how one or more of the tax resolution strategies listed above might fit your unique situation, please contact S.H. Block Tax Services today. Our mission is to help you find an efficient and affordable resolution to your tax problems so you can start rebuilding and moving forward.
To schedule your free initial consultation and speak with a tax expert from our team, call (410) 872-8376 or use the contact form on this page.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.
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