Tax debt reduction plans were created for those taxpayers that cannot fulfill their entire tax debt due to financial difficulties. The IRS only considers those taxpayers for tax debt reduction that cannot take credit, use their assets to fulfill the debt, and do not have enough income to pay the entire tax debt.
The IRS requests disclosure of financial information to determine a taxpayer’s ability to pay their tax debt if they apply for a tax debt reduction. Along with the income, the IRS reviews a taxpayer’s ability to pay, expenses, and asset equity.
Tax Debt Reduction through Offer in Compromise
Offer in Compromise is an IRS debt reduction plan that allows taxpayers to have their total tax debt amount reduced by the IRS so they can pay the balance and resolve their tax debt case. The IRS tries to get the maximum amount in tax debt within a reasonable period of time. As Offer in Compromise involves negotiation with the IRS, taxpayers must prepare their case considering every factor the IRS reflects upon to achieve maximum tax debt reduction.
Under Offer in Compromise, taxpayers have the choice of either paying the balance in a lump sum cash payment or in monthly installments. Taxpayers that meet the Low Income Certification guidelines are not required to pay the application fee, the initial payment, and are not required to make monthly installments during the evaluation process. They will only need to begin paying after their application is cleared by the IRS.
Before applying for Offer in Compromise, taxpayers must have filed all their tax returns. Taxpayers in an open bankruptcy proceeding cannot apply for Offer in Compromise.
Tax Debt Reduction through Partial Payment Installment Agreement
Partial Payment Installment Agreement (PPIA) allows taxpayers to pay a reduced amount of tax debt in monthly installments over a period of time. Only taxpayers whose financial condition does not allow them to pay the full tax debt amount, but a part of it, can qualify for PPIA.
The IRS considers a taxpayer’s ability to pay by reviewing their income, assets, liabilities, expenses, and equity. If a taxpayer meets the eligibility criteria, the IRS determines the amount the taxpayer can pay in monthly installments. As with Offer in Compromise, preparation and representation of the case is immensely important in achieving a resolution that falls in favor of the taxpayer.