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What if you owe more in taxes than you can pay?

On Behalf of | Sep 12, 2022 | Tax Law |

Maybe you earned a very competitive salary at the height of your career and employed an aggressive accountant who claimed to legally minimize your tax obligations. You felt pleased with the results of their work, and you had no reason to question their professional ability. Perhaps you simply misunderstood certain rules about tax preparation when you did the paperwork yourself every year.

Individuals find themselves behind on their tax obligations for all sorts of reasons. Not everyone is in a position to immediately fix the problem when they discover it or receive a delinquency or audit notice. In fact, quite a few people notified of an impending audit or a massive tax debt due will find that they do not have the resources to pay that amount in full.

If you owe too much in taxes and don’t know what to do, you may want to see if you are eligible for an offer in compromise.

You can legally reduce how much of the tax that you pay

Once the Internal Revenue Service (IRS) knows that you have underpaid your taxes, they will often pursue collections aggressively. The IRS has the authority to garnish your wages or place leads against your valuable property. Additionally, they could prosecute you. The total amount that you owe will likely increase quickly because there will be interest applied, in addition to penalties and fees.

Especially if your income has decreased in recent years, you may not be able to pay the full amount due at once. An offer in compromise can be a way to settle what you owe. You will have to propose a specific and reasonable compromise based both on what income and assets you currently have and what you owe the government.

Those able to make a lump-0sum payment of 20% of the total debt often have more flexibility when negotiating such arrangements. The IRS will also accept periodic payments on the debt, although interest will likely accrue on the amount owed.

Making a reasonable proposal can be difficult

What you feel you can spend and want the IRS views as your disposable income may be very different figures. The average person will struggle to create their own offer and compromise, let alone successfully propose it to the IRS and then carry it out. Professional support is frequently necessary for those attempting to handle large tax debts and unable to pay what they owe in full immediately.

Learning about different tools for handling income tax debts, like an offer in compromise, can benefit those facing the tax controversy.

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