When people underpay their federal income taxes, their financial circumstances can shift drastically. Income tax debts quickly grow due to fees and interest assessed by the Internal Revenue Service (IRS). A previous underpayment of taxes can snowball out of control and create an insurmountable financial obligation.
When taxpayers discover that they have an unpaid balance due that continues to accrue interest daily, they often panic because they cannot pay the full amount immediately. They may be able to work with the IRS to negotiate an offer in compromise. An offer in compromise is a settlement arrangement for tax debts. The taxpayer offers a lump-sum payment in some cases or proposes a structured repayment plan.
What factors influence the terms of offers in compromise?
The amount of tax debt
The IRS does not automatically approve requests for tax debt settlement or payment plans. Instead, a thorough review of the proposed terms is necessary. One of the most important considerations is the total amount owed to the IRS. The larger the tax debt becomes, the more likely the IRS is to engage in aggressive collection activity. Of course, as tax debt increases, the ability to repay it quickly and fully usually decreases.
The income of the taxpayer
An offer in compromise has to be appropriate given the current financial circumstances of the taxpayer in arrears. When considering an offer in compromise, the IRS is likely to look carefully at an individual’s assets and income. There is usually an expectation that the taxpayer should commit a significant amount of their disposable income toward their tax debt. Offers in compromise that only allocate a tiny fraction of available resources toward the tax debt are less likely than more aggressive plans to receive approval from the IRS.
Secondary financial pressures
In scenarios where people cannot commit a significant portion of their income to their tax debts, they generally need a compelling explanation as to why. Financial obligations related to basic household expenses and secured debts can influence how the IRS responds to an offer in compromise. Recurring expenses, including health insurance premiums, mortgages and vehicle payments, can all influence how much capital an individual actually has to commit toward monthly tax debt payments or a lump-sum payment. Individuals facing tax controversies and large income tax debts often need help exploring their options and communicating with the IRS.
Proposing an offer in compromise is a reasonable reaction to a large income tax debt. Taxpayers who have support are more likely to negotiate viable payment arrangements or settlements with the IRS.