People might underpay their income taxes for many different reasons. Some people misunderstand their reporting obligations or attempt to take credits and deductions for which they do not actually qualify. Others may fail to report all of their different streams of income.
When the Internal Revenue Service (IRS) learns that an individual has underpaid their taxes, collection efforts often begin shortly thereafter. Not only does the taxpayer have to pay the amount of taxes that they owe, but they are also usually responsible for interest and penalties as well. The balance that they owe may slowly continue accruing if they cannot pay everything in full immediately. Those facing large income tax debts often feel powerless and anxious.
Are there any solutions that can help taxpayers behind on their obligations take control of their situation?
The IRS may agree to settle
Not every tax debt requires payment in full. The IRS sometimes accepts settlement offers. Income tax debts can easily exceed what people can expect to repay based on their assets and incomes.
If income tax debt is alarmingly high, then the taxpayer might be able to settle what they owe. The IRS does occasionally agree to settle income tax debts for less than the full balance owed. Taxpayers can propose offers in compromise based on their income and personal holdings.
An offer in compromise might involve a single lump-sum payment that covers a sizable portion of the income tax debt but not all of it. The IRS may also agree to payment plans when a taxpayer makes an offer in compromise.
Both scenarios can lead to people reducing the total balance owed to the IRS. The IRS does not accept every proposal. Factors, including the likelihood of the taxpayer successfully paying off the entirety of the debt, influence how the IRS responds to an offer in compromise.
Those hoping to take control of their finances by reducing their income tax debt and preventing escalating collection efforts may need support. Partnering with a tax law attorney can help people address their tax debt and settle what they owe. An offer in compromise can be a helpful solution for people feeling overwhelmed by their unpaid income taxes.