Why would the IRS even consider settling a tax debt? After all, you rightfully owe an IRS tax debt and they can legally enforce collection from you through wage garnishment, levying your bank account, and much worse. What’s the incentive for the IRS to settle tax debt or to offer tax relief? The answer is quite simple. It is more efficient and cost-effective for our government to settle IRS tax debt by agreeing to forgive prior year tax debts (accept an Offer in Compromise) if it encourages future voluntary compliance by taxpayers. So, yes, you can really settle your tax debt with the IRS as long as you are in compliance, have the proper taxes being paid in for the current year, and offer an appropriate amount.
How Many Years of Back Tax Returns Must Be Filed?
The last six years of tax returns must be filed with the IRS in order to be considered in tax compliance. Yes, this means that even if you haven’t filed in 10 years you only need to file the last 6 years in back taxes. Why? The IRS simply doesn’t have the manpower or resources to handle going back any further.
Why Do I Owe Taxes This Year?
The reason why taxes are owed on any return is because not enough taxes were withheld or paid in during the year. For many employees, taxes are withheld from each paycheck by the employer and remitted on their behalf to the IRS. For many self-employed people, they are responsible for remitting taxes throughout the year by making quarterly estimated tax payments. The IRS will not consider settling a tax debt if a taxpayer cannot demonstrate that they won’t end up digging themselves deeper into tax debt year after year. Therefore, making adjustments to have the proper amount of taxes withheld or paid in throughout the year is a critical element when trying to settle tax debt with the IRS.
How Much to Offer to Settle Tax Debt?
The appropriate amount to offer the IRS under the Offer in Compromise program (also sometimes referred to as the Fresh Start Program) is based on a formula that the IRS uses called “Reasonable Collection Potential” also known as RCP. In short, the RCP is calculated by taking into consideration a taxpayer’s assets, income, and allowable living expenses. The IRS gives consideration for expenses such as rent/mortgage, food, vehicle loans and operating costs, daycare, health insurance, medical costs, and even state taxes owed in some cases. In general, the IRS only has 10 years to collect on a tax debt once it is assessed. Therefore, if the RCP shows that a taxpayer cannot fully pay the debt in the time remaining on the 10 year timeline to collect (statute of limitation) then the IRS is incentivized to settle the tax debt.
In closing, it is in the best interest of the US government via the IRS to settle tax debt if it encourages future voluntary tax compliance and RCP calculations reveal that a taxpayer won’t be able to pay the debt in full before the time the IRS has to collect taxes runs out.
About the Author:
Lauren Massie, CPA, EA, MBA resides in Raleigh, North Carolina. The primary focus of her CPA practice is income tax representation for individuals who need tax help with the IRS or the North Carolina Department of Revenue. She regularly assists clients with issues such as unfiled tax returns, back taxes, wage garnishments, bank levies, installment agreements, and the filing of an Offer in Compromise to settle tax debts. Have questions? Lauren can be reached directly at (919) 792-8511 or through this link.
I’m here to help!
Lauren Massie
Lauren Massie, CPA, PLLC
8480 Honeycutt Road, Suite 200
Raleigh, NC 27615
(919) 792-8511
Lauren Massie, CPA, PLLC is based in Raleigh, North Carolina and serves clients throughout the Greater Triangle Area including cities such as Wake Forest, Durham, Cary, Chapel Hill, Morrisville, Holly Springs, Fuquay-Varina, Clayton, Louisburg, Knightdale, Zebulon, Rolesville, Wendell, Hillsborough, Youngsville, Franklinton, Garner, Zebulon, Henderson, Franklinton, Holly Springs, Creedmoor, and Angier.