When people estimate their income taxes, they can easily fall short of their actual obligations. Annual income tax returns help reconcile the amount paid in advance with the actual tax liability of a person, household or business for the year.
Income tax debts can accrue rapidly. In addition to the amount they failed to pay, taxpayers are also typically responsible for interest and certain fees assessed by the Internal Revenue Service (IRS). Many people do not have enough liquid capital on hand to pay the entirety of their income tax debt at once.
An inability to pay income taxes could immediately result in additional interest and more penalties. In some cases, taxpayers may want to consider making an offer in compromise. There are generally two approaches to an offer made to resolve income tax debts, and each can be helpful for people in different situations.
Offering a reduced lump-sum payoff
People with limited income or other budgetary constraints may want to make a reasonable offer in compromise based on their current resources. The IRS may consider a lump-sum payment of less than the total amount due. Generally, the amount offered needs to be reasonable given the details of the situation.
Offering structured payments
In cases where individuals have a reliable source of income but inadequate savings to cover their tax debt, proposing a payment plan can be an option. Offers in compromise often involve a series of structured payments that might last for years.
In either case, the IRS may counter the initial offer, which makes careful preparation and calm negotiations very important. Reviewing income tax debt can help taxpayers prepare to make an offer in compromise. Successful offers can help people avoid additional enforcement efforts and may ultimately reduce how much they have to pay the IRS for their income tax debts.