You’re probably wondering if there really are 5 ways to reduce a tax debt. It may come as a surprise, but the truth is that the law provides more than 5 ways to reduce (or avoid paying) the entire amount you owe. So, unless you love the idea of paying the IRS more than you have to, the first step is to determine whether your tax debt qualifies for a reduction.
The chances you qualify are probably better than you think. Many taxpayers meet the eligibility requirements for a reduction in penalties. Some qualify for a “pennies on the dollar” tax settlement. And, crazy as it may sound, it might even be possible to resolve your tax issue without having to pay the IRS a single penny. For a simple overview of my top 5 methods of reducing or eliminating a tax liability, read on.
For our purposes here, I am going to assume that your tax liability is accurate. In other words, you filed accurate returns or were assessed with an audit liability which you cannot successfully dispute. If that is not the case, then you may be able to reduce your liability simply by amending and filing accurate returns or by appealing the findings of an audit. Whether that’s the case or not, you may qualify for one or more of my top 5 methods of reducing or eliminating a tax liability. Here they are.
Offer in Compromise Based on Doubt as to Collectability
When you hear a radio or TV ad promising to settle your tax debt for “pennies on the dollar,” an Offer in Compromise (OIC) based on Doubt as to Collectability (DATC) is what the advertiser is talking about. To qualify for an OIC based on Doubt as to Collectability, you must demonstrate that you do not have the financial ability to repay your tax liability within a reasonable amount of time. Although this is not an easy thing to demonstrate, those who succeed often walk away with a huge reduction in their tax debts. The proverbial “pennies on the dollar” tax settlements do, in fact, happen.
The best candidates for an OIC based on DATC don’t have a huge amount of equity in their assets relative to the size of their tax debt, live a somewhat modest lifestyle, and don’t have a lot of excess cash left over each month after they pay for their necessary living and/or business expenses. If you own a home that has equity, you can reduce the market value of your home by 20% and then subtract out what you owe against it to determine “net realizable equity” (which is your “equity” for the purposes of this kind of tax settlement). So, even if you have significant equity in your home, you could still qualify for this kind of tax settlement. Both business and individual taxpayers may be eligible for an Offer in Compromise based on Doubt as to Collectability.
Example: We had a client who owed a little over $100k in income taxes. His equity in assets was minimal. Though his income was about $100,000 per year, we demonstrated that his income was barely enough to cover his necessary expenses. We convinced the IRS to accept a little over $3,000 as settlement in full for his unpaid tax debt.
Offer in Compromise Based on Doubt as to Liability or Effective Tax Administration
Some taxpayers who don’t meet the criteria for an OIC based on DATC can still qualify for a tax settlement by way of two other methods. The first is an OIC based on Doubt as to Liability (DATL). With this type of tax settlement, you succeed by building a case that casts doubt on the legitimacy/legality of your assessed tax debt. You would offer to settle it for a smaller amount based on the argument that you legitimately should not owe some or all of what the IRS claims you owe.
The second alternate method is called an OIC based on Effective Tax Administration (ETA). With this type of tax settlement, you prove that paying the entire tax debt back would cause a hardship.
Importantly, you need not prove an inability to pay back your tax debt for either of these types of Offers.
Example: Clients of ours owed about $30,000 in taxes stemming from both business and unpaid joint income taxes. The husband had several medical problems and is a senior citizen. Though, technically, the clients could have paid off their tax debt over time with installment payments, we made a compelling case to the government that doing so would have created a serious hardship. This one was a little tricky because part of the liability was only in the husband’s name and the other part of it was a joint liability. Consequently, we negotiated two separate settlements. The end result is that we got the IRS to accept a total of $500 to settle all of their tax debts, and the Effective Tax Administration Offer in Compromise method was the way we were able to accomplish that.
Penalty Abatement (and First Time Abate Program)
There are many different ways to qualify for a penalty abatement (elimination of some or all tax penalties). The two most common ways to get penalties abated by far are by either demonstrating that you had “reasonable cause” or by qualifying for the First Time Abate Program.
If you can prove to the IRS that you had “reasonable cause,” which in lay terms amounts to having a dang good excuse for late filing or late payment, the IRS will abate all penalties that resulted from reasonable cause. Several common events that are often considered a “dang good excuse” are death or serious illness of the taxpayer or someone in the taxpayer’s immediate family, unavoidable absence of the taxpayer, fire, casualty or natural disaster. There is also a catch-all provision that allows the IRS to abate penalties if the taxpayer can demonstrate that they acted with reasonable business care and prudence, but were nevertheless unable to meet their tax obligations.
The First Time Abate program can be utilized to get rid of the penalties for the first period for which a taxpayer became delinquent. There are some basic eligibility criteria that must be met, but this is often a viable option to get rid of at least the first delinquent tax period’s penalties.
Example: I represented a business that was owned by 4 family members. One of them had a serious injury, which caused a domino effect of problems for the business. The IRS might normally deny a penalty abatement request with a case like this and take the position that the other 3 owners should have made sure that the taxes got paid on time. However, I was also able to demonstrate that the business experienced financial problems during the timeframe in question that were beyond the owners’ control. I spent a lot of time developing and preparing a lengthy and compelling abatement request including a substantial amount of supporting documentation, and I combined arguments based on both the serious injury of the taxpayer and the catch-all provision that my clients exercised ordinary business care and prudence, but were nevertheless unable to comply with their tax obligations. Although the IRS officer with whom I was working initially told me that there was “no way” she would abate my client’s penalties, the hard work I put into building this abatement case won her over in the end, and she ultimately agreed to waive more than $75,000 in penalties—well worth my efforts.
Partial Payment Installment Agreement (PPIA)
A PPIA is a type of installment agreement where the monthly payments are not large enough to pay off the entire tax debt within the 10-year collection statute of limitations. After the 10-year statute expires, the remaining tax debt becomes uncollectible (you don’t have to pay it). We’ve had a number of clients remain on their PPIA throughout their collection statute. After that, a large portion of their tax debt was effectively forgiven.
As you might imagine, the IRS wants to collect every penny of every tax debt, including penalties and interest. So, they don’t agree to PPIA’s lightly. The qualification criteria for a PPIA are similar to those for an Offer in Compromise based on Doubt as to Collectability (discussed above). In short, you’re a good candidate if you don’t have a lot of equity in assets and your income isn’t significantly higher than your allowable expenses.
Many taxpayers make good candidates for both an OIC and a PPIA. Therefore, it’s wise to consult with an experienced tax relief attorney to determine which option is better for you. The biggest difference between the two options is that the IRS will continue to periodically request financial information from you with an eye towards increasing your monthly payments if you go the route of a PPIA, whereas an OIC settlement is final and cannot be modified provided that you adhere to its terms. OIC monthly payments are often higher, and sometimes much higher, than PPIA payments, which can make the PPIA option seem more attractive. However, the fact that PPIA payments have the potential to increase in the future means that the lower monthly payment option is not always the best option.
Example: A business client of ours owed over three quarters of a million dollars to the IRS. Our team proved that the business had neither enough equity in assets nor excess income to full pay its tax debt within the 10-year collection statute. We then convinced the IRS to accept just $2,500/mo for a PPIA. Our client was already well into the 10-year collection period when the IRS agreed to these terms. Thus, this agreement, assuming it continues to stay in effect for the remainder of the collection statute, will result in more than $500,000 of our client’s tax debt being effectively forgiven. Not too shabby.
Currently Not Collectable (CNC)
How would you like to repay none of your tax debt? This does, in fact, happen for some taxpayers, and Currently Not Collectable (aka CNC) is the way they do it. Like the previously discussed PPIA and OIC based on Doubt as to Collectability, you generally can’t have a lot of equity in assets. The difference is that for CNC, you must also demonstrate that you are unable to afford any monthly payments. If approved, you won’t be required to pay…anything (at least for the time being).
Like a PPIA, the IRS will require that you periodically submit updated financial information with an eye towards seeing if your circumstances have changed such that you can begin making payments towards your back taxes. But, we’ve had clients remain in CNC for the duration of their collection statute and walk away at the end of that having repaid the IRS nothing. You heard that right. Some of them had very large tax liabilities (one owed over $2,000,000), and they did not pay the IRS a single penny.
Example: A client of ours had a 6-digit tax debt. We proved the client couldn’t afford to make any payment whatsoever to the IRS and that they did not have the ability to pay down the tax debt by selling off, or borrowing against, assets. During the first part of our client’s 10-year collection statute, the IRS required our client to provide updated financial information every couple of years or so. After a couple go-arounds of that we were able to cut a deal with the IRS where our client would not have to go through the hassle of further periodic financial reviews so long as their adjusted gross income didn’t exceed a negotiated dollar amount. Our client’s collection statute ran its course and expired. The result: not a single dime was paid on a 6-digit tax liability!
If you would like to learn whether you qualify for a reduction in your tax liability, pick up the phone and give Fortress Tax Relief a call. We have caring and knowledgeable professionals on staff who can evaluate whether you qualify for a money-saving tax relief program over the phone. There is no charge for a telephone consultation, and it typically takes less than 15 minutes for one of our tax pros to pre-qualify you. Great news could be just minutes away, so pick up your phone and give us a call today!