While many people fear being audited by the IRS for past tax returns, owing back taxes is actually a more stressful situation. If you owe, there are a couple of ways to deal with the situation.
Dealing with Tax Debt
First things first. The best advice on deal with back taxes is to…well, deal with them. Many people make the mistake of sticking their head in the sand when it comes to tax problems.
The IRS inadvertently helps this happen because it takes the agency a while to figure out you owe money and then take action to collect the back taxes. Once the agency gets rolling, however, it can bring all kinds of nasty weapons to bear. Your bank account can be cleaned out and your wages garnished to mention only a few of the tactics used. Throw in the fact penalties and interest accrue on your tax debt and it can get ugly quickly. If you have a tax problem, deal with it. You will be far better off taking proactive action versus waiting for the IRS to do something.
Assuming you are ready to act, you have a number of options available to you. So, what are they?
The first option is to ask for an installment agreement. The IRS has a policy of trying to get delinquent tax payers back into the system. Effectively, this means the agency will grant installment agreements in a vast majority of cases. With the installment agreement, you make month payments against the tax debt over a period of 5 years. It is also important to understand that you will be required to file all past tax returns that you never got around to before the IRS will approve your request.
The second option is to ask for an offer in compromise. Although touted as the answer to all your tax problems by various companies, the offer in compromise is not as readily granted as they suggest. With the offer, you are basically telling the IRS you have little or no assets and income to speak of so it should give you a break on whatever you owe in back taxes since you have no reasonable prospects of paying the debt. The IRS will actually approve such requests, but only if you actually have little to your name. If you are doing fine financially, but never paid your taxes for some reason, any offer in compromise request will be rejected out of hand.
Your third option is to ask for a designation of “not currently collectible.” This is a serious misunderstood tactic. Essentially, you use it when you are dead broke and have nothing. If the IRS agrees with you, it will stop trying to collect anything from you. There is a catch, however. You still owe the tax. The IRS has a 10 year window to collect it. After 10 years, the IRS has to let it go. In practical terms, this means you have to remain flat out broke to escape paying the back tax! All the while, penalties and interest will be accumulating on the amount you owe. In short, this is a tactic to be used as a last resort.
If you owe past taxes to the IRS, proactively address your situation. You will get a handle on your tax situation and be able to sleep better at night.
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