1. Offer in Compromise
While some settlements may result years of payments plus interest, alternative methods of settling your taxes exist through an offer in compromise. In this method of settlement, which will often compromise in a “Doubt as to Collectability Offer,” the IRS will examine your individual circumstances including
•Ability to pay
•Income
•Expenses
•Asset equity
The way of settling debt commonly referred to as an OIC, offer in compromise, has grown easier in past few years. In the past, the IRS would calculate the monthly amount an individual could afford to pay towards their debt and then multiply this by 48 months to estimate the value of income. This 48 would then be multiplied by the amount a person could pay. However, new rules dictate that the IRS now use a formula which only multiples by 12 months, resulting in a lower amount due.
Scam Warning
While an OIC may prove a feasible way to mitigate debt, it is also one of the most widely used processes in tax scams which promise that you will pay only “pennies on the dollar.” The best rule when sifting advertisements is that when it comes to IRS settlements, if something is too good to be true, it probably is.
2. Installment Agreement
Another, less popular but perhaps beneficial, method is called an Installment Agreement. This works like a payment plan to the IRS. The positive aspects of this type of settlement are that it contents the IRS preventing them from taking further collection action or from bothering the taxpayer as often. And other benefit is that it is a flexible and nearly always open option for people seeking to settle their debt.
3. File Past Tax Returns
A commonly overlooked approach is to simply file an amended return despite its being past the deadline. This can often reduce a taxpayer’s liability. Trying this may also result in a decrease in potential penalties and interest charged.
Why is Bankruptcy Not the Best Option?
Many people automatically opt out in favor of bankruptcy or simply waiting for the IRS’s period to collect to expire. But this is often a poor option because bankruptcy will not cancel all tax debt as commonly believed. Only a specific portion of income tax can be discharged by declaring bankruptcy. And simply waiting for the end of 10 year window in which the IRS is allowed to collect will not always work either. Although there is the potential for the cancellation of the taxpayer’s debt, the IRS will mostly likely impose a lien or a levy on the taxpayer’s property. Furthermore, this form of taxpayer deficiency may result in a decision by the IRS to make an exception and extend the 10 year time frame.
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