1. Penalty Relief from the IRS
Most taxpayers ask for tax reduction but that is not necessarily what is available. Penalty abatement will lower the tax debt, but you need to be careful as the penalty could still be accruing and you may only abate part of it. Many taxpayers are entitled to a First Time Penalty Abatement of the Failure to File and Failure to Pay Penalty. To qualify you must:
- Not have had a penalty assessed more than 3 years prior to the year in question
- Not have received reasonable cause penalty relief in the past
2. Replacing returns filed by the IRS
The IRS will file substitute returns on your behalf but will file returns with no exemptions or deductions. Also, if you are-self-employed, you may have had business expenses that were not included. It would be beneficial for you to replace those returns and you can always do it.
3. Amend Returns or Challenge Old Returns
You always have the option to amend a tax return or challenge an audit, if you were not given the opportunity to do so. Even if it is past 3 years, the IRS will reconsider a tax debt if you did not have the opportunity to do so previously or you were unaware of your deductions and the tax liability is incorrect. You can do this by filing a new amended return or by filing a Form 656-L which challenges the tax liability.
4. Offer In Compromise
The old stand-by, an offer in compromise can be filed. It basically tells the IRS you cannot afford the tax debt. It will be based upon a 24-month appraisal of your income and assets (in most cases). Taxpayer need to be aware that if your debt is new or you are younger (chances are that your finances could improve) this option may not be available to you. To submit an Offer in Compromise, you must submit a Form 656 (the application for the Offer) and a 433-OIC (the financial statement) along with documents including pay stubs, bank statements, bill statements, and other financial information. Please be aware of national standards. The IRS will not accept your expenses if they are too high and exceed the national standard limit. TIP: Do not lie about income the IRS pulls a credit report and looks at your income history.
5. Part Payment or Hardship
If you cannot afford the tax debt you can always get a financially based settlement called currently not collectible or part payment. This requires you telling the IRS about your financials. National Standards will apply here. You will need to submit a 433-F which is a financial statement. National standards do apply so expenses cannot be too high.