When you’re dealing with a tax debt, the first thing to do is determine exactly how much you owe. If you did not file a tax return, the IRS may have filed a substitute for return (SFR). This is a return the IRS files on your behalf by using information from third parties, such as employers and banks.
If you haven’t received any communication from the IRS regarding an SFR, you may file your tax return and claim all the deductions and credits allowed. Even if the IRS has filed an SFR, you should file your own tax return because the IRS does not include all deductions and credits you qualify for when estimating your tax liability.
If you filed on time, you may amend your tax return if you haven’t claimed all of your deductions and credits. You will be required to have supporting documents to prove your claim. Keeping a proper record will ensure that you are protected in case of an IRS audit.
Remember to calculate penalties and interest. The IRS will apply penalties and interest for a late payment even if you filed your tax return on time.
After you know exactly how much you owe in back taxes, you may explore several IRS options:
- Installment Agreement
- Offer in Compromise, or
- Currently Not Collectible
An Installment Agreement allows you to pay your back taxes in fixed monthly installments. If you owe less than $50,000, the IRS doesn’t require you to provide a financial statement. You may also be able to resolve your tax debt using the Partial Payment Installment Agreement.
With an Offer in Compromise, you may be eligible for tax debt reduction if the IRS finds that you cannot afford to pay your entire tax debt. If you qualify, you can pay the reduced amount in installments.
Currently Not Collectible (CNC) is the status the IRS assigns to cases when they cannot collect any amount of back taxes. Getting the status of CNC does not mean that the debt is forgiven; it only means that the IRS will not pursue collection actions until your financial condition improves and you become capable of paying something towards your debt.