How to Chose the Best Tax Debt Settlement Strategy

When you owe the IRS or Maryland for back taxes, you need a strategy to choose the best method. The amount yo will ultimately pay to put your tax debt behind you and move on with your life depends on several factors. As a general rule, the more income and assets you have and the more recent the taxes are, the more you will have to pay.

If your income is limited, you have few assets and the taxes are older, you may be able to pay little or nothing to settle your tax debts.

Because there many different ways settling your tax debt, you will need to collect the basic facts first.  Download the attached “Tax Debt Analysis” form to use as a guide.  If you owe taxes to the IRS and MD, you should use a separate form for each.

You should put in your best guess as to the amounts and not get too hung up on the details.  The idea here it just to see which methods will work for you and which will not.

After you have narrowed it down to 2 or 3 methods, you can go back and fill it in with greater detail if necessary.

Section 1 Priority Taxes

Priority taxes are taxes that are less than 3 years old. The time is measured from the date the taxes are due (generally April 15 of the following year). These are the hardest taxes to reduce or eliminate because they are the newset.  Taxes, like most debts, generally become harder to collect as time passes. So the IRS. like most debt collectors is more aggressive with newer debts.

Fill in this section with the amount you owe and penalties if you can.

Section 2 Non-Priority Taxes

These are taxes that are more than 3 years old AND the returns have been filed.

The IRS and MD are more likely to give you a break if you have been filing your taxes.  Even if you can’t pay, filing shows you are making a “good faith” effort to obey the law.

Section 3 Income

The less income you have, the less you will probably pay to the IRS or MD. If your income is higher, you may have to pay more, but you also may have more “allowed” expenses.

Fill in this section with rough estimates of the various types of income and then add them up.

Section 4 Expenses

The IRS and MD understand that you still need to keep a roof over your head and feed your family, so they have tables of allowed expenses to see what you have left over. These categories do not exactly match the IRS or MD forms, but will give you a general idea of your net income.

Section 5 Assets

Put the “Net” value of the assets.  This is what would be left over after selling the assets minus any expenses and liens. For real estate, you g=can estimate about 10% for cost of sale. If you could sell your home for $200,000 and you owe $150,000, you would net about $30,000 ($200,000-$20,000-$150,000=$30,000).

Now, how do I see what method is best for me?

1-File my taxes

This is a must if you want to settle your taxes for less than you owe. You are not eligible for an OIC with either the IRS or MD when you have unfilled taxes. You also may not be eligible for CNC status or get a bankruptcy discharge with unfiled taxes. The biggest exception to this rule is that MD will set up a payment plan for you even if you have not filed.  The problem is that they will use their amounts, which may be much higher than what you actually owe.

2-Payment Plans

If after filling out the income and expense forms you have excess income, then you will probably have to make payment arrangements.  This can be an Installment Agreement with the IRS or MD. Or it could be a Chapter 13 bankruptcy.  In either case, you make regular payments but there are advantages and disadvantages to each.  If you don’t have other debts and most of your tax debt is priority, then an installment agreement may be best.  If you have other debts or you have priority AND non-priority tax debt, then a Chapter 13 may be better. When you set up an installment agreement, every dollar you pay goes to the OLDEST tax debt.  When you file a Chapter 13, you pay the NEWEST tax debt first. and the older tax debt may be discounted.  Chapter 13 can also eliminate most tax penalties.

3-Pay Less Than You Owe

If you have income, but it is all eaten up by allowed expenses AND you have few assets, then an OIC or Chapter 7 may be your best option.  To get a rough idea of what you would have to pay for an OIC, multiply your net income by 12 and add your net assets.  For example, if your net income is $250 and you have $10,000 in assets, the IRS will want $13,000 ($250×12=$3,000+$10,000) and give you 5 months to pay.  If you need more time, you can pay over 24 months. But then they want 24 months of net income plus net assets – $16,000.

If the taxes are older, non-priority taxes then you may want to consider a Chapter 7.  Unlike an OIC, you can exempt or protect many common assets like your 401k or IRA in a Chapter 7. So you might be able to pay far less than you would otherwise.

4-Ask For a Break

If you have otherwise been good about filing your taxes and just made a mistake, you may be eligible for a penalty abatement or innocent spouse relief.

5-Too poor to pay

If your income is limited and you have no assets, you can either apply for CNC status or simply ignore the situation.  You may be able to wait out the IRS because they only have 10 years to collect from you.  MD has 20 years, so it may be more difficult.

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