The IRS offers numerous settlement options to taxpayers who are struggling to settle their tax owed. In this post, we will discuss about the advantages and disadvantages of some of the most common IRS tax settlement options.
1. Audit Reconsideration
Advantages: There are many situations in which a taxpayer may qualify for this option. Even in cases where the time limit to appeal is expired, the taxpayer can still request audit reconsideration.
Drawbacks: Your tax return should be audited originally and you should have valid reasons with evidence for not attending the audit. The process can take very long and sometimes, you may be required to appeal.
2. Full Payment Installment Agreement
Advantages: An easiest settlement plan to obtain, a full payment installment agreement can help avoid levies and garnishments. Liens will be withdrawn once full payment of taxes is made.
Drawbacks: A collection information statement is required, if the tax amount owed is over $25,000. One biggest drawback is that the interest and penalties will continue to accrue while you still owe. You may get limited time to repay and the IRS can also file a tax lien, when needed.
3. Partial Pay Installment Agreement (PPIA)
Advantages: Partial Payment Installment Agreement allows taxpayers to pay an affordable monthly payment, based on their financial situation. It is easier to obtain than an offer in compromise and you settle the debt for less than the total amount owed.
Drawbacks: It requires full financial disclosure and you will be even required to pay down your debt with any liquid assets. The IRS will reassess your financial situation every so often. Furthermore, the federal tax lien and its impact remain in place right until the expiration of the collection period.
4. Penalty Abatement
Advantages: Tax penalties that start out as a small amount can quickly spiral out of control, so in certain cases, a penalty abatement can stop the accrual, or even remove them completely.
Drawbacks: For many, penalty abatement isn't an appropriate solution because of their bad history of non-compliance. Even if you qualify, you still need to pay the base amount of owed tax in full.
5. IRS Offer in Compromise
Advantages: An offer in compromise allows the taxpayer to pay a reduced amount of the original tax liability. During the negotiation process, the IRS will suspend collection activity and when accepted, any tax liens on the taxpayer’s property will be lifted.
Drawbacks: This offer in compromise program is not for everyone and it can be difficult to get approved. The OIC will be kept in the public records for a year or more. The IRS has the right to intercept your tax refund and any payments you make. For a period of 5 years from the time the IRS accepts your offer, you must stay current with tax filings and payments. If not, the IRS has the power to revoke the Offer.
6. Currently-Non-Collectible (CNC)
Advantages: This plan will prevent all "enforced collection" activity from the IRS (like levies and garnishments) and you don't have to pay any monthly payments till your financial condition improves.
Drawbacks: The drawback of “Non-collectible" status is that all outstanding liabilities will continue to accrue interest and penalties. This option will provide some temporary relief but does not solve all of your tax problems.
7. Bankruptcy
Advantages: Chapter 7 bankruptcy allows full discharge of older tax debts. The process is really quick; a taxpayer can receive a bankruptcy discharge within 4 months of filing.
Drawbacks: Trust fund taxes are not dischargeable in Chapter 7 bankruptcy. It will damage your credit rating drastically. Even in bankruptcy, the tax lien will not go away.
