The Tax Increase Prevention and Reconciliation Act of 2005 has ushered in new rules for settling tax debts with the IRS. Here is the scoop on the compromise procedures.
New Procedure for Settling Tax Debts with the IRS
If you owe the federal government back taxes, there are two approaches you can take to resolve the issue. The first is to file an installment agreement wherein you agree to pay off the debt by making monthly payments. The second is to try to settle the bill with a one time payment, which is often relatively low given your position you will not reasonably have the money to pay back the total bill. This rules and procedures related to this second approach have changed dramatically.
The settlement process, often called an offer in compromise, underwent a massive change with the passage of the Tax Increase Prevention and Reconciliation Act of 2005. Starting July 16, 2006, the new rules go into affect and they are a bear. The biggest issue is you now must pay 20 percent of your offer amount to even have the settlement offer considered!
The procedure now works as follows. To file an offer in compromise, you must prepare and file Form 656. This form essentially lays out your assets, income, debt amount and the offer you are making given these figures. You must pay $150 when submitting the bill. You must also now pay 20 percent of your offer amount. Neither of these amounts is refundable.
It may take the IRS up to two years to get around to making a decision. If the agency accepts your offer, it will send you acknowledgement and the terms thereof. If the agency does not accept the offer, it keeps your deposit and comes after you. Welcome to the wonderful world of taxes!
There are two exceptions to the 20 percent deposit rule. If you are a low income taxpayer under IRS rules, you need not make the deposit. Further, if you are contesting the taxes due because you believe there has been an error and you are not reasonably responsible for them, you need not file the deposit. Keep in mind the reason must be reasonable, not one of the arguments that nobody has to ever pay taxes.
The new procedures for filing for tax debt settlement are odd given the new 20 percent deposit amount. However, this still represents the best way for dealing with tax debts.
Richard A. Chapo is with BusinessTaxRecovery.com - providing information on taxes.
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