Individual circumstances related to federal tax liability of different taxpayers require different solutions for getting out of tax debt. There are five ways to deal effectively with tax debt that cannot be paid immediately. However, not all may apply uniformly to the unique situations relating to different individuals and a taxpayer must carefully examine all options to select one best suited to his situation.
For one, he can request the IRS to set up an installment agreement that would allow him to pay all his tax liability in monthly installments over a predetermined period. The duration over which the tax debt can be paid will depend on the paying capacity and various other circumstances of the taxpayer. The IRS requires extensive information and supporting documents to determine eligibility for an installment plan, the monthly installment amount and duration of payment.
It is necessary to first make a request for setting up an installment plan. The taxpayer needs to submit form 9465. The form has to be filed along with the tax return. The IRS then takes about thirty days to respond by intimating the taxpayer whether his request has been accepted or turned down. If the return has already been filed, an online request can be made by filling in form OPA (Online Payment Agreement) on the IRS website. If the request is accepted, the taxpayer will be allowed to clear the debt in manageable monthly payments over a period that may extend up to ten years from the date of assessment of tax.
However, the payments will include penalty, interest and setting up fees also and it is advisable for the taxpayer to seek a commercial loan and pay off the tax liability in one lump sum instead of opting for an installment plan through which he will end up paying a much larger amount.
A new option called the Partial Payment Installment Option similar to the installment plan was introduced in 2005 by the IRS. Before this, the only way for paying in installments was to clear the liability in full. This new option allows the tax liability to be paid partially in installments; the entire amount owed is not paid back. However, when allowed recourse to this option, the taxpayer undergoes a financial review by the IRS every two years and if his financial circumstances are found to have improved sufficiently there may result an increase in payment or even termination of the agreement.
Submitting an Offer in Compromise is another method to get out of tax debt. The offer can be made by filling in IRS form 656 along with form 433A/433B. The offer is made by a taxpayer who is unable to pay off the tax liability in its entirety. If the IRS feels that the full amount of the liability will not be recovered, it is competent to settle the liability for a lesser amount and can permit it to be paid either in lump sum, over two years or less or over the balance period of ten years or less starting from the date the liability was assessed.
Although very damaging to credit ratings, filing for bankruptcy is another option to avoid paying IRS liability. However, not all IRS taxes, interest and penalties qualify for forgiveness/discharge in bankruptcy. Therefore, all issues should be explored before resorting to bankruptcy to get out of IRS tax debt.
Lastly, there is a situation where the IRS considers the tax liability as currently not collectible. In this situation, it will cease to pursue collection. However, later there may be collectibility determinations based on subsequent actions.
