Tax time can be quite an overwhelming experience for many individuals and businesses alike. The constant changes in tax laws and regulations, as well as the fear of filing incorrect documents, can often result in a sense of panic and anxiety. One wrong calculation can lead to severe consequences, from financial penalties to even legal actions.
However, the good news is that the US tax laws offer a way out – tax settlements. A tax settlement is an agreement between the taxpayer and the Internal Revenue Service (IRS) to resolve an outstanding tax debt for less than what’s owed. In this article, we’ll discuss the ins and outs of tax settlement to help you make an informed decision.
1. Reasons for Seeking a Tax Settlement: There are various reasons why tax settlements are sought out. Individuals who cannot afford to make full payments for their tax debts may opt for a tax settlement, while businesses that have accumulated tax debts due to unforeseen circumstances such as economic downturns, natural disasters, or prolonged illnesses may also seek tax settlements.
Additionally, individuals and businesses that find themselves in an audit situation and owe tax debt to the IRS may also choose to negotiate a tax settlement.
2. Types of Tax Settlements: There are two types of tax settlement agreements – Offer in Compromise (OIC) and Installment Agreement (IA).
An OIC is an agreement between the taxpayer and the IRS to settle the tax debt for less than the full amount owed. This type of agreement usually takes into consideration factors such as the taxpayer’s ability to pay, income, and expenses.
On the other hand, an IA is an agreement that allows the taxpayer to pay off the tax debt in installments over time. This agreement is suitable for individuals or businesses who have the ability to pay off the tax debt, but in smaller amounts over time.
3. How to Apply for a Tax Settlement: Applying for a tax settlement can be a complicated process, and it is recommended that you seek the assistance of a licensed tax professional. This individual can review your specific tax situation and recommend the best course of action.
To apply for a tax settlement, you will need to fill out the appropriate forms and provide supporting documentation. The IRS will review your application and may ask for additional information before making a decision.
4. What Happens After a Tax Settlement is Approved: Once the IRS approves a tax settlement agreement, the taxpayer must adhere to the terms and conditions of the agreement. In the case of an IA, the taxpayer must make timely payments according to the agreed schedule. Failure to do so may result in defaulting on the agreement.
In the case of an OIC, the taxpayer must pay the agreed-upon amount in a lump sum or in installment payments. Additionally, the taxpayer must also file and pay taxes on time for up to five years after the OIC has been approved.
Tax settlements are an option available to individuals and businesses who owe tax debts to the IRS but cannot afford to pay them in full. There are two types of agreements – Offer in Compromise and Installment Agreement – that have their own requirements. It is essential to ensure that you secure the services of a licensed tax professional to navigate through the procedure of seeking a tax settlement for the best outcome.
By understanding tax settlements and the options they provide, individuals and businesses can take control of their financial situations and work towards achieving tax compliance.