People in a variety of situations may find themselves facing allegations of tax underpayment. Perhaps someone misunderstood what deductions or credits they could apply when filing their taxes. Maybe they failed to calculate their tax obligations using all of their sources of income.
When the Internal Revenue Service (IRS) determines that someone has failed to pay their income tax obligations in full, those people may face audits, collection activity and sometimes even prosecution. The IRS demands not just payment for the amount of taxes that someone previously failed to pay but typically also interest and penalties assessed on those past-due amounts.
Particularly if someone made the same mistake multiple years in a row, they may not have enough money in their savings accounts to pay their tax debt in full. What does someone facing a significant tax controversy do if they cannot pay what they owe?
The IRS may accept an offer in compromise
Although the IRS does generally expect to receive full payment for someone’s financial obligations, the organization can also work with those who make a good faith attempt to resolve their tax debts. In some cases, people can potentially settle their tax debt and pay less than the full amount they owe.
The IRS allows taxpayers to propose an offer in compromise when they have fallen behind on their income tax obligations. An offer in compromise might involve a single lump-sum payment or regular payments spread out over months or even years. The taxpayer with past-due tax responsibilities typically needs to propose a specific repayment plan to the IRS when proposing an offer in compromise.
They need to balance the desire to reduce what they pay and keep their finances balanced with the need to pay as much as they can as quickly as possible. If the IRS accepts an offer in compromise, the taxpayer can potentially settle what they owe for less than the full balance of their unpaid tax bill. Someone who successfully makes an offer in compromise could avoid prosecution or additional financial penalties as interest continues accruing on what they owe the federal government.
Learning about different solutions for income tax debt may benefit those who are facing an audit or who have recently been notified about an underpayment of their income tax obligations.