Step 4: Choosing your Roadmap
Fixing tax problems
Fixing your IRS tax problems can be a simple process once you have a clear understanding of what needs to be fixed. The IRS works very slowly, so resolving your tax problems usually does not happen over night- in fact, it can tax several months or years to fix completely.
Choosing the best plan to fix your tax problems will not only save you time, but also ultimately affects your end result. In other words, choosing the wrong Roadmap can leave you paying more taxes than you otherwise would have by taking an alternate route.
After finishing your call with the Internal Revenue Service and completing the Investigation guide worksheet, you will have a thorough understanding of your tax situation. There is not “one-size-fits-all” solution to resolving tax problems.
What to consider
What to consider when fixing your tax problems:
Do you owe the tax?
Inaccurate tax liabilities can arise from a mistake at the IRS, SFR Returns, non-filing, and much more. Simply fixing the root cause could eliminate your tax debt in its entirety.
How much do you owe?
Compare your total tax debt to your ability to pay it back. Having a significant can also affect how aggressively the IRS acts with involuntary collection activity, like liens, levies, and garnishments.
Is the tax debt expiring?
Consider the expiration date of your taxes before setting up a payment plan or submitting an Offer in Compromise. These programs will affect the tax expiration date. If only a partial amount of your tax debt is expiring, you may be faced with setting up a payment plan to avoid garnishments and/or a bank levy.
What is your RCP?
Calculate your Reasonable Collection Potential with some quick income and expense calculations. Make sure to include asset values. Can you pay back the tax debt in full? If not, consider an Offer in Compromise. Otherwise, find another option for reducing your tax debt then set up a payment plan.
Is paying back taxes unaffordable?
If yes, consider an Offer in Compromise.
Can you pay the tax with a payment plan?
If paying your tax debt in full is within reach, set up an Installment Agreement. There are several flavors of payment options to choose from depending on your total amount debt.
Did your spouse create the tax liability that you owe?
Did your spouse create a tax liability without your involvement? Consider applying for the Innocent Spouse program.
Have you been paying off your back taxes but still owe penalties?
You can sometimes have penalties removed from your total tax bill by applying for penalty abatement. The IRS will consider removing penalties if you have reasonable cause.
Was there a mistake on your tax return?
Simply fixing a mistake on an old return can bring your tax liability down to an accurate amount. If you still owe money, pay it down with an Installment Agreement.
Are you being audited?
Understanding why you were audited is important. Audits occur when there is a significant mistake made on your return or discrepancy with what the IRS has on their records. Working with your Auditor to prove what you reported was accurate can reduce your tax bill. Understanding expenses and business taxation as it relates to your profession or industry is extremely helpful.
Do you have a revenue officer?
Having a Revenue Officer generally means you have progressed through IRS Collections process. Treat the Revenue Officer as your main point of contact to resolving your tax debt. You can consider all options for tax resolution.
Have you filed your tax returns?
Before moving forward, you need to file your tax returns and wait for the returns to process with the IRS. Replacing SFR returns with original returns could reduce or increase your tax debt. Consider your options after filing depending on your current financial situation and total tax liability.
Did the IRS file a SFR for one or more years?
SFR returns do not include any expenses or deductions that you have the right to claim, nor do they include exemptions or dependents. Do a mock-tax-return to see if makes sense to replace those SFR returns with original returns.
Do you owe payroll taxes?
Payroll taxes are extremely hard to settle on. They are considered a “trust fund” that was not paid back. Consider your tax resolution options as you would with normal income tax debts.
Why use a Payroll Software?
Using a payroll software will automatically withhold and pay taxes for you. Whether you have employees or you want to have taxes withheld from your business income, payroll software is a great solution.
- no mathematical errors
- automatic tax withholding
- automatic payments to the IRS and State (if applicable)
- automatic form generation (Form W-2 and Form 1099) at year’s end for employees and contractors.
Do you also owe back taxes to your State?
Consider the amount you owe to the IRS and State tax departments. Will paying the State affect your ability to pay the IRS, too?
Are you a business owner?
Completing an Offer in Compromise is difficult if you are still operating a profitable business and have business assets. However, it can still be done!
Do you have substantial assets?
Although your income might be low with respect to your monthly expenses, the IRS will still consider the money you can get from selling your personal and business assets. Before striking out with an Offer in Compromise, have a clear understanding of all your value the IRS might look at to collect from.
How long do you have to react?
Are you far in the collection process? If yes, consider a collection hold while you work on resolving your taxes. Automatic collection holds are usually given if you need some time to work on resolving delinquencies.
You risk being garnished or levied if you want too long!
Do you have a wage garnishment or bank levy?
Removing a garnishment can be done by setting up a payment plan or reducing your tax liability. Also consider fixing tax returns, filing back tax returns, and/or paying off enough for the IRS to reduce or remove the garnishment.
Have you been served or mailed demanding notices?
Be proactive when you receive a letter from the IRS. Understand the letter’s meaning so you can promptly respond to any requests and avoid future problems. Certified letters or notices about taxes owed means you are in the collection process and it is time to take action.
Be sure to update the IRS
Make sure to constantly update your Revenue Officer or an IRS representative with a status of how you are planning to resolve your tax debts and the actions you are currently taking. This will prevent or delay involuntary collections.