The IRS offers several different settlement options to taxpayers who are struggling with their tax debts. This article will discuss about the pros and cons of seven major IRS tax settlement plans.
1. Full Payment Installment Agreement
Pros: It is one of the easiest tax settlement options to qualify and can stop levies and garnishments. Once paid in full, you can request to have the lien removed.
Cons: If the amount you owe is greater than $25,000, you are required to submit the form 433F. Another drawback is that the interest and penalties will continue to accrue until the balance is paid in full. The repayment time will be generally limited.
2. Partial Pay Installment Agreement (PPIA)
Pros: In this plan, you will pay the IRS something that you can afford each month. Once the statute of limitations ends, the IRS can no longer collect on the debt even though it is not fully paid.
Cons: The IRS will review your financial information throughout the course of the installment period to find if your financial condition has changed. This means, the IRS can potentially modify or terminate the agreement at any time. In a few situations, the IRS will intercept your tax refund and apply the money to your debt.
3. Audit Reconsideration
Pros: In this option, you are not required to file financial statements (433-f) as the IRS won't analyze your financial ability to pay the tax owed.
Cons: You should have never attended the original audit and you have valid records to support the reason for your non-appearance. The entire process will take very long and sometimes, you may be required to appeal.
4. Penalty Abatement
Pros: With penalties and compound interest, it won't take long for your tax debt to spiral out of control. Through penalty abatement, the penalty can be lowered or removed altogether, in some cases.
Cons: Penalty abatement will not eliminate the base amount of owed tax, so you still have to pay the rest of the liability in full. And since a lot of people have a bad history for non-compliance, the abatement is not 100 percent guaranteed.
5. Offer in Compromise (OIC)
Pros: The OIC program allows paying only a fraction of what you owe and the balance is forgiven. You credit rating will improve when your offer is accepted.
Cons: An Offer in Compromise is generally the most difficult settlement option to qualify and the IRS may take up to one year to review an OIC. Sometimes, the IRS will waive tax credits and refunds. You should be perfectly tax compliant for five years (filing and payments). If not, the IRS will negate the OIC and reinstate the entire amount of pre-compromise tax liability.
6. Currently-Non-Collectible (CNC)
Pros: Under hardship status, you don't have to pay anything to the IRS and most times, you can remain there until the CSEDs expire. Also during this time, you will not be subject to levies.
Cons: Since the IRS gets nothing, your financial situation will be regularly reviewed. Even though the collection action will be suspended, you will still be subject to IRS-imposed interest and penalties.
Pros: Chapter 7 bankruptcy allows full discharge of older tax debts. There is no maximum limit to the amount of debt that can be discharged.
Cons: A Chapter 7 bankruptcy can negatively affect your credit score. It will not eliminate payroll tax debts. Some debts (like mortgage liens) can be collected even after the case is closed.