4 options for resolving or reducing back taxes

Tax liability may be resolved or reduced through the amending or filing of past returns, installment agreements, offers in compromise or penalty abatement.

Each year, many people in Connecticut have trouble paying their taxes or even begin falling behind on what they owe. According to U.S. News, in 2013, an estimated 8 to 20 million Americans owed outstanding taxes. Most people who find themselves in this position can benefit from understanding the various options for addressing or at least reducing their outstanding tax debt.

1. Installment agreement

People who enter into installment agreements with the Internal Revenue Service commit to paying down their outstanding tax debt in monthly installments. According to the IRS, an installment agreement requires a person to pay off all of his or her debt. Reductions of accumulated interest or penalties may be available, however.

An installment agreement halts collection actions and is an available option for most people. However, this arrangement might not be advisable for people who have significant amounts of tax debt and can only afford to make small payments toward it.

2. Offer in compromise

An offer in compromise allows a person to resolve his or her outstanding tax debt by agreeing to pay the IRS a reduced total. A person's eligibility for this arrangement is determined based on several criteria, including:

  • The person's income and the worth of his or her assets
  • The person's financial liabilities and obligations
  • The person's ability to make payments toward his or her debt

An offer in compromise allows for debt to be repaid either in a lump sum or in installments. The IRS requires most consumers to submit an initial payment along with the application for an offer in compromise, but there are exceptions for people whose income falls below a set threshold.

3. Filing or amending returns

A person may also be able to obtain partial relief from tax debt by filing late returns or amending previously filed returns. When a person fails to file a return, the IRS files a substitute for return, which does not account for the various deductions and exemptions that a person may qualify for. Amending or filing a late return can allow a person to correct any overstatements of his or her tax liability.

4. Seeking penalty relief

Requesting the abatement of tax penalties is another way that a person may be able to reduce his or her tax liability. Administrative errors or erroneous advice on the part of the IRS can provide grounds for the dismissal of penalties. People who had reasonable cause for failing to report income or pay their taxes may also qualify for relief from penalties.

Speak to a professional

The best option for addressing unpaid taxes or IRS collection matters often depends largely on a person's circumstances. Therefore, before making any final decisions, people who owe outstanding taxes may benefit from reviewing their options with an attorney. An attorney may be able to give a person advice that accounts for his or her unique situation and provide any assistance needed during the tax resolution process.