Possible Tax Solutions to your Tax Debt


The IRS takes into account several factors when deciding whether one is eligible for a tax resolution. There are some options available for each taxpayer that is explained below.

IRS Installment agreement

Very few people take this option when, in reality, it is a great option. A person can finally show the IRS that he is willing to pay back the taxes, but in installment monthly payments. Once an installment agreement is agreed upon, the IRS stops bothering the taxpayer over the liability. You can expect a reduced number of calls and letters at your home since you have accepted the responsibility of paying back the money owed over an extended period. This option fails when a lot of taxes are owed to the IRS and the installment payments only cover the interest payments and not the principal amount. It can be a good short or medium term option to get rid of tax liability gradually.

This option is quite flexible in nature, and IRS is put on hold on taking further actions against the taxpayer. A possible drawback of this action is that it could be prolonged unnecessary as the taxpayer is kind of forced to accept more accrued interest payments, which is just increasing the tax liability in reality.

Filing the past returns

Another tax solution is by filing the past returns of tax. Sometimes a taxpayer can reduce the money owed to IRS if there was some calculation error in reaching the tax liability figure, and such overstatements can reduce the tax liability. This is a great option to consider as it directly reduces the amount that is owed.

The obvious benefit from this option is that tax liability is decreased based on each dollar that was overstated previously. It also helps in reducing any penalty or interest payment that is directly charged to the taxpayer. Drawback regarding this option is that the taxpayer is supposed to know knowledge about the tax code. Most people do not have that kind of knowledge so hiring a tax professional is highly recommended.

Offer In Compromise (OIC)

OIC, or offer in compromise can be used to tax debt-relief purposes when the taxpayer is ready to set off the tax liability with his income or assets. IRS usually gives this option to those who have a huge tax liability and are not able to pay it. It should be noted that people in bankruptcy are not given this option. This is actually a form of settlement and works out well in the long run.

The benefit of this solution is that the taxpayer is allowed to reduce his liability via settlement, which is a really good alternative. Furthermore, the IRS stops its collection actions and methods against the taxpayer which is a big relief.

The drawback of choosing OIC is that this option can turn out to be lengthy. Settlements through OIC do not happen just in a day. Years can pass by and as long as two years need to be invested to remove tax liability through this option.

Expiration of the collection period

Most people do not know this, but IRS can only claim tax liability from others in a period of 10 years. When the time period is over, IRS has no claim over the tax payer’s money. However, you should not consider this option as a loop hole in the system. IRS is clever enough to take an action based on tax lien, where a person’s property is taken as collateral. This option should be kept as a last resort, but it can work well if a person has no property. This option of tax debt relief has the ability of wiping out the entire tax liability of the person, which makes it attractive.

This is a kind of method that is never advised to the taxpayers unless the conditions of the taxpayer are very severe. IRS usually file a lien on the property of the taxpayer in order to avoid running out of the 10 years limit which prolongs the waiting time, and makes this option invalid. This means that the ball still remains in the court of the IRS as they have methods to prolong the deadline in any case.

Other methods

Some other options you can avail for tax debt relief includes bankruptcy. By claiming bankruptcy, a person can waive off some of the income tax and reduce the tax liability. However, that income should be from the period which is three years before the filing of bankruptcy.

One can also claim a state of currently not collectable; where a person claims that he cannot really pay taxes due to a severe situation of not being able to make a living. This state is only achieved and considered when the person can prove that the necessary expenses for living are exceeding the income, which makes survival difficult. This is a short-term solution and can give a taxpayer sometime in relief as the IRS considers this situation and allows the taxpayer to get stable by granting some time off from the payment, or even reduce the liability in some special cases.

A taxpayer can also pursue the option of penalty abatement. This is an option where the taxpayer files an official request with the IRS. Reasons for such requests include incorrect liability attached to taxpayer or other reasonable factor that IRS may have to take into account. This can work in some exceptional cases and can be a useful tool to remove or at least reduce the tax liability.

Another option of tax debt relief is the innocent spouse relief. This can work for those individuals who have a spouse and have a joint return filed. If the spouse is involved in filing the tax returns with flaws, only then this option can be availed. The reason one can use for reducing tax liability is that the individual was unaware of the actions of the spouse who created the whole liability or penalty. IRS in such cases has to remove tax liability, since the innocent spouse was ignorant and oblivious of the situation.