IRS Back Taxes Help And How To Get Forgiveness

We’re going to be talking about what to do to get forgiveness if you owe the IRS back taxes.

Do you know you may not have to pay all of it back?

We’re going to talk about two different ways that you can handle your back tax situation without having to pay all of it back. Yes, it is possible – and it does happen quite a bit so, let’s get into it …

Obviously, the very name of the IRS strikes fear into the hearts of a lot of people. You get those letters in the mail, right?

The classic IRS logo on the envelope, you know, what’s inside of there, you think that you owe or maybe you know that you owe and there’s that letter you are now on the IRS radar. So that can be quite intimidating. I mean the IRS is one of the biggest agencies of the federal government and probably one of the most powerful. They can take your wages. They can take, your vehicles, boats, guns, jewelry, artwork, and even real estate, in some instances, so very powerful.

They can garnish your wages, they can take retirement money. They can take 1099 money, you don’t want to mess around with them.

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What do you do if you owe the IRS back tax?

1. IRS offer in compromise (OIC)?

What is that? What’s an offer in compromise you may have heard of it also known as or referred to as the fresh start – the IRS fresh start initiative.

There are other things that are part of the fresh start, but the IRS offer in compromise is a settlement. You owe the IRS fifty thousand dollars and you settle for a thousand, and you may be saying to yourself too good to be true, not many times it may be. You know if you have more cash in the bank than what your tax bill is, you’re not going to do an offer in compromise, so people come to me and say hey. I want to do an offer in compromise. I don’t want to part ways with the two hundred thousand dollars I have in my retirement account to pay my twenty thousand dollar tax bill. Sorry, buddy, not going to work.

The IRS is going to make you tap into any asset that you have to pay down the tax balance,

However, let’s assume you don’t have those kinds of assets. You don’t have adequate equity in your house. You don’t have a lump sum amount in the retirement account. You don’t have the cash in the bank as far as assets go. You don’t really have a lot of assets. Maybe it’s all tied up in your business, maybe you’re just getting into real estate or e-commerce or another self-employed type business model, and so you don’t have the assets.

What about your income? Because for an offer in compromise to work in your favor, those are the two things that the IRS is going to look at – your household income and your assets. So, if we assume for a moment, that you don’t have adequate assets to pay the tax. What about your income?

Do you know that a family of three with two car payments lease or loan, paying a modest health insurance premium, and making up to eighty thousand dollars a year can still qualify for a very aggressive offer in compromise? Eighty thousand dollars isn’t that, let’s think about that for a second, it’s not bad money, so eighty thousand dollars a year, and you could potentially settle a million dollars back tax for as little as 500 bucks and ask me how I know that?

We just did one of those, and so, if you owe the IRS back tax and you think there is no way you’re ever going to repay that, then an OIC is definitely something that you should look at.

IRS Financial Standards and what it means

A little pro tip here, the IRS has something called financial standards: financial standards in certain categories like food, clothing, and housing utilities, and they automatically will allow you that financial standard that amounts to offset your income. Again, remember we’re talking about how to qualify for an offer in compromise.

That’s income minus expenses! That’s how much you have to contribute and then they annualize that amount, and so you want to get your income reduced as much as possible. So if you go and submit the offer in compromise – and you say well, you know because things are tight – we only pay a couple of hundred bucks for food and clothing a month. Bad mistake. The IRS automatically gives you for a family of three as an example about fourteen hundred dollars a month for food and clothing, and you may say: well I don’t pay anywhere near that yeah join the club, I don’t either, but the IRS automatically gives you that amount each month.

So if you go and submit the offer in compromise make sure you look up what those financial standards are, because the IRS allows you to take those automatically without proof, without having to substantiate in certain categories and so that’s kind of a free gift from the IRS for purposes of the offer in compromise, but you have to be aware of that.

There are other categories where they do that, such as housing and utilities, vehicles, and out-of-pocket health care costs. So make sure you take a look at that.

Another pro tip is when you go and submit the offer in compromise right. Be sure you’ve got your paperwork together, and you have copies of your bank statements. They’re going to want to see those and all of the documentation is in order.

You better make sure that all of your tax returns have been filed, and I’m not just talking about this year and last year’s I’m talking about going back as far as even 10 years, this is part of the requirements for an offer in compromise. You have to be current and compliant means that you have all of your outstanding tax returns filed.

How do you know? How do you know there’s not a year out there? Maybe something happened you forgot to file it.

Pull your transcripts. Now you can actually go onto the IRS website and create an IRS account and you can view your transcripts year by year and see which years do not have a tax return filed. That’s very important!

You definitely should do that because the return must be filed or they will not consider the offer in compromise. In fact, they’ll reject it. If you submit that offer in compromise, and you have open returns, I said two things there I said current and compliant means tax returns, and current means if you’re self-employed. So if you’re a real estate, agent, e-commerce, professional, or another self-employed individual, you have to make sure that you’re current with self-employment tax, and those estimated tax payments, and if you’re not they’re not going to process your offer in compromise. Until you get current, and so if you submit it and it’s a past quarter, two you’re going to have to have quarter one and quarter two of estimated tax paid.

Take a look at your last year’s tax return, divide the amount of the tax that you owe less any estimated payments that you made or payments with the return divide that by four that’s how much your estimated tax is per quarter and that’s what the IRS is going to go by when they just determine what your required estimated tax is to be current for purposes of the offer in compromise.

So the offer in compromise is a great tool if you owe back tax again completely irrelevant to a certain degree what you owe or how much you owe, you could owe a hundred million dollars and still settle for a couple hundred if that’s what your income and assets allow now.

Of course, the higher the dollar amount, the more scrutiny the IRS is going to give your case above 50,000 general counsel at the treasury department has to sign off on your case if the IRS is going to do one of these settlements. So you want to make sure your documentation is in order. You want to make sure all those returns are filed. You want to make sure that you are current with estimated tax and, finally, you want to make sure that you are not in bankruptcy. If you have got an open bankruptcy, they will not consider your offer in compromise.

So that’s very important. Your bankruptcy proceedings do need to be closed before you submit the offer in compromise, and you may be saying well why can’t I just include my tax and my bankruptcy? Some of it may be dischargeable some of it’s not.

So if you are planning on doing a bankruptcy, either do the offer in compromise before or make sure your bankruptcy is closed before you file your offer in compromise. So that is a great tool to be able to eliminate back tax from the IRS. Don’t forget if you have an approved, offer in compromise, so you got that great letter in the mail. One of my favorite things to do is when we get those in the mail calling our clients, letting them know the good news.

But if you got that IRS offer in compromise approval letter in the mail, wonderful awesome good for you, you have wiped out the back tax. You’ve received that forgiveness from the U.S government. In a sense, here’s an important reminder for the next five years right mark it down five years from the date of acceptance of that offer. You cannot be late with a tax return come April 15th.

You cannot owe another penny. Okay, you have to make sure that you have any outstanding tax paid by April 15th. So if it’s 2022 the year is over and then in 2023 you’re getting ready to file, do it early do it in February when you get your w-2s or you get your 1099s to get that return prepared, find out what you owe, and get it paid well before April 15th and get that return filed well before April 15th, five years, what happens if you forget to file and you cross the April 15th deadline, or maybe you ended up owing a couple of hundred bucks and you just thought I’ll file. Wait for them to send me an invoice if it goes past April 15th and it’s not paid, the offer in compromise defaults. You owe back tax and the IRS may file a judgment against you in federal district court.

So don’t go that route. If you are one of the winners in that sense, where you have your back tax forgiven through the offer in compromise, don’t mess it up, you have to be current compliant for five years. Five years after that, and so you want to make sure that you stay on top of that – so that’s number one offer in compromise

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2. Installment Agreement

Number two is an installment agreement and that doesn’t sound that exciting I mean we just talked about a settlement right.

I mean an installment agreement is boring, but it is an option. You can get on an installment agreement. Most installment agreements are for 72 months.

Take what you owe generally add up those amounts that are on the letters you receive, divide by 72, and in most cases, that’s going to be your payment amount. Sounds kind of boring sounds kind of lame, and not as exciting as a settlement, but the good news is if you get on an installment agreement and if you have penalties – those penalties can hurt in some instances as high as 50 percent of your balance is from penalties. Even more, is probably from interest, but if you have penalties on your back tax balance and you get an installment agreement set up, it is possible to request an abatement of penalties. The two penalties I’m referring to are the failure to file penalty.

That’s the late filing penalty and the failure to pay penalty. Okay, those two penalties can be abated. The easiest way is if this is a one-off occurrence, where you’ve never written back tax before you’ve always been on time with your returns and you’ve always paid the balance, and this is a one-time occurrence, then you can qualify for first-time abatement.

Now you can call us and we’ll do it for you for 500 bucks, but I’m just messing around with you. All you need to do is just call the IRS number 1-800-829-1040. Call the IRS early call them early in the morning.

Okay, don’t wait because the lines get busy, and tell them you want to request a first-time abatement for your penalties. They’ll look at your account, they’ll verify all your returns are filed that are due. Make sure those returns are filed, they’ll make sure you do have an installment agreement set up, so you already have to have that established and then they’ll make sure for whatever year you’re requesting that first-time abatement. So let’s say it was for well we’ll say: 2017. Okay, you did a retirement withdrawal and you ended up with a back tax balance for 2017. If it’s for 2017, where the penalties are they’re, going to look at 2016 2015 and 2014 and make sure that there are no penalties in those years. If you don’t have any penalties in the three preceding years, you qualify for a first-time abatement just by asking the IRS to remove penalties.

Now, maybe that’s the first year you went self-employed and you know you didn’t file the return on time and you ended up with a 50 000 tax balance if all the penalties max out you’re looking at 25 to 30 000 penalties. On top of that 50 000 in tax, just by asking the IRS, you can drop your balance by that amount.

Now interest is not available under law. You cannot remove interest that has been assessed or accrued on the tax liability, however, the interest that has accrued on those penalties will come off when the penalties come off. So that’s a great win, so you can see how, in that scenario, getting on an installment agreement may not be as exciting as an offer in compromise, but nonetheless you can still save a lot of money by requesting that first-time abatement.

Now you may be saying: hey, you know I got into real estate, I’m a real estate agent and I’ve been doing 1099 work for a long time and every year I’ve owed tax and I’m trying to get it straightened around working with my tax professional.

I don’t have three years where there were no penalties. Every year has penalties. What can I do in that scenario?

That’s called reasonable cause abatement, reasonable cause penalty abatement. So if you have a good reason why the tax wasn’t paid or why the returns weren’t filed, the IRS will entertain that reason and give you reasonable cause abatement.

Here’s a little pro-tip. Do not call the IRS for reasonable cause abatement. They don’t tell us exactly what the dollar threshold is, but I do believe it is less than a thousand dollars. So if you have more than a thousand dollars of penalties for reasonable cause, don’t confuse that with first-time abatement. Okay, first-time, abatement, there is no limit over the phone, so thirty thousand dollars of penalties for first-time abatement, fine, okay, call them in.

But for reasonable cause, if you don’t qualify for a first-time abatement, you have to write okay because they will deny it over the phone because of the dollar threshold. So you have to establish that you had reasonable cause for not filing or for late paying, and then they can potentially abate those penalties.

Don’t forget, the same rules apply, all returns must be filed and you have to have an installment agreement established if that’s the route you’re going to talk about what to do.

Call us on 855-812-3760 for a totally FREE confidential consultation to speak with our local tax professionals about your IRS back taxes forgiveness help.

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