In addition to offers in compromise, bankruptcy, and uncollectible (See Part I, above), here are three more solutions to owing back taxes to the IRS:
- Statute of limitations on collection. The IRS has 10 years to collect unpaid taxes – starting from when the IRS puts the tax liability on its books (this is usually when a tax return is filed or an audit is completed). The limitations period is is the ultimate ace in the hole and is not to be squandered – there is an end date to your IRS problem. Getting there requires properly calculating the end date and navigating getting to the goal line.
If the end is near, great care should be exercised not to cause unnecessary disruption – options like submitting an offer in compromise or filing a collection due process appeal should be carefully considered in advance. They extend the IRS collection timeframe.
- Installment agreement. If you can, it is always best to repay the IRS. But installment agreements do have ongoing interest and penalty accruals that make repayment difficult. Rule of thumb: If the liability cannot be repaid in five years, it likely will never be. In those situations, a Chapter 13 bankruptcy may be beneficial to make your payments as it can stop interest, penalties and repays principal.
- Interest and penalty abatement. It would be nice to have the IRS abate interest and pay tax only, but the IRS only abates interest due to their own errors. For example, interest could be abated if the IRS unreasonably delayed responding to your correspondence. As to penalties, there needs to be reasonable cause why a penalty should not be imposed. Not having the money to pay your taxes unfortunately won’t do it. Generally, penalty abatement works best with factors out of your control – failed health, out of the country, lost records from fire.