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There are numerous possibilities for reducing your tax liability if you’re unable to pay your entire tax bill. If you can make a strong enough case for your inability to pay your tax obligation in-full, the IRS will consider your income, assets, and future financial prospects to determine whether or not you are eligible for reductions in penalties, fees, and interest, and sometimes even the original tax liability. The IRS uses this information to calculate what repayment method is required–either an installment payment plan or a lump-sum payment–in return for drastic tax liability reductions.
Some options for reducing your tax liability might include:
- Penalty Abatement
- Non-Collectible Status & Statute of Limitations Expiration
For Delinquent Tax Payment Plans
Payment plans for delinquent taxes come in short and long term arrangements. Approval for one of these plans will depend on your current financial situation and ability to repay. A long-term arrangement will set up payments over 120 days or more. You must owe a combined amount (taxes, penalties, and interest) of $50,000 or less to qualify for this option. For a short-term payment plan, payments are set up over 120 days or less. To qualify, you can owe a combined amount of up to $100,000.
For Tax Penalty Relief
For a delinquent taxpayer to qualify for tax penalty relief, they must meet the following requirements:
- Filed all their currently required tax returns
- Arranged to pay or paid any tax due
- Didn’t previously have to file a return or didn’t have any penalties for the 3 tax years prior to a penalty being assessed
For Offer-in-Compromise Tax Relief
When the IRS reviews your application for an offer in compromise, they will determine whether or not you qualify by considering factors such as:
- Your income
- Your expenses
- Your assets
- Your ability to pay