There are many ways that people could end up with income tax debt. For example, they may have switched professions and begun working as an independent contractor. They may not have realized they had to set money aside to cover their taxes and have inadequate savings when they file their annual federal income tax return. They may have secondary streams of income, such as investment dividends or rental payments from real estate holdings, that significantly increase their taxable income.
In some cases, the failure to disclose certain types of income or assets could also result in an underpayment of income taxes. Regardless of the underlying cause of the income tax debt, the taxpayer can expect what they owe to slowly but steadily increase. The Internal Revenue Service (IRS) assesses penalties for late payments and other tax issues.
They also collect interest on the balance due. In scenarios where people cannot cover what they owe, they may worry about IRS collection efforts. Thankfully, there is a potential solution available for those with large tax debts and inadequate resources to pay the amount in full.
The IRS accepts payment plans and settlements
In some cases, individuals may be able to make monthly payments but may require years to pay off what they owe. Other times, it may be possible to negotiate a settlement where the taxpayer provides a lump-sum payment that is less than the total amount due.
Taxpayers and the attorneys who represent them can contact the IRS to propose offers in compromise. Offers in compromise can involve either one-time payments or a structured payment plan. Particularly in scenarios where limited assets or income make paying the tax debt in full prohibitively difficult, the IRS may be receptive to offers from taxpayers.
Of course, the offers have to be reasonable given the extent of the debt and the current resources of the taxpayer. It can be difficult for individual taxpayers to understand how to structure an offer and negotiate terms with the IRS. Those hoping to limit their income tax obligations may need the help of an attorney.
Hiring legal representation may make it easier for those overwhelmed by federal income tax debt to propose a viable offer in compromise. Taxpayers who take assertive steps to address their financial responsibilities can limit the lasting consequences of their current income tax debts.
