Tax Problem Resolution: What Are Your Options?

Tax problem resolution is a structured process for individuals and businesses to settle their tax liabilities. Ignoring a tax notice can lead to escalating penalties and more aggressive collection actions. The process involves understanding the problem, gathering financial information, and exploring solutions like payment plans, challenging assessments, or seeking specific relief.

Engaging with the tax agency and providing accurate information is part of reaching a resolution. This approach can turn a difficult situation into a manageable series of actions.

Initial Steps When Facing a Tax Issue

The first step in addressing a tax problem is to interpret the notice you have received. A common notice is the CP2000, which the IRS sends when reported income does not match your tax return. This notice is a proposal to adjust your taxes and typically has a 30-day response deadline.

Another notice is the CP504, which signals the IRS’s intent to levy your state tax refund or other property for an unpaid balance. A more severe notice is the Letter 1058 or LT11, a Final Notice of Intent to Levy. This gives you 30 days to act before the IRS can seize assets like bank accounts or wages.

Once you understand the notice, you must gather financial documentation by completing a Collection Information Statement, such as Form 433-F. This form is used by the IRS to assess your financial situation and ability to pay. You will need to collect documents verifying your income, a detailed list of your monthly living expenses, and a list of all your assets and associated debts.

Payment Solutions for Tax Debt

When you agree with the tax owed but cannot pay at once, the IRS offers several payment solutions. A short-term payment plan allows up to 180 additional days to pay your liability in full. You can request this extension through the IRS’s online payment application or by phone, but interest and penalties continue to accrue.

For those who need more time, an Installment Agreement (IA) allows for monthly payments, typically up to 72 months. To apply, you can use the Online Payment Agreement tool or submit Form 9465. Streamlined criteria exist for taxpayers who owe a combined total of under $50,000, consisting of tax, penalties, and interest, and these agreements are often approved without a detailed financial statement.

When establishing an IA, user fees are involved. The setup fee varies depending on the type of agreement and how you apply. Applying online for a direct debit IA has a lower fee than applying by mail or phone. Interest and late-payment penalties continue to accumulate on the unpaid balance until it is paid in full.

For taxpayers facing significant financial hardship, an Offer in Compromise (OIC) may be an option to resolve tax liability for a lower amount than what you originally owed. The IRS considers your ability to pay, income, expenses, and asset equity when evaluating the offer. To apply, you must submit Form 656 and a financial statement, either Form 433-A for individuals or Form 433-B for businesses.

The OIC process requires a non-refundable application fee and an initial, non-refundable payment. The IRS investigation can take several months, during which collection activities are typically suspended. If your OIC is accepted, you must comply with all tax laws for the next five years, including filing all returns and paying all taxes on time.

Challenging an IRS Assessment

If you disagree with the tax amount the IRS claims you owe, there are channels to dispute the assessment. One path is Audit Reconsideration, which is an option if you have new information to present that was not considered during the original audit. This process is for presenting new documentation, not for disagreeing with the legal interpretation of tax law.

To request it, you would send a letter to the IRS office that handled your audit, explaining the situation and providing copies of the new supporting documents. Your letter should state that you are requesting an audit reconsideration and include your name, taxpayer identification number, and the tax year in question. The IRS will review the new information and may adjust your tax liability.

A more formal route is through the IRS Independent Office of Appeals. You can request an appeal after receiving a statutory notice of deficiency, often called a 90-day letter. This notice gives you 90 days to file a petition with the U.S. Tax Court, and you do not have to pay the disputed tax while your case is being considered.

To appeal a collection action, such as a lien or levy, you would file Form 12153, Request for a Collection Due Process or Equivalent Hearing. This must be done within 30 days of the date on your collection notice. The appeals process provides an opportunity to have your case reviewed by an impartial officer and negotiate a resolution.

Handling Penalties and Past-Due Returns

The IRS may assess penalties for failing to file on time, pay on time, or prepare an accurate return. It is possible to have these penalties removed or reduced through penalty abatement. One basis for abatement is “Reasonable Cause,” which applies if you can demonstrate you exercised ordinary business care but were unable to comply with tax laws due to circumstances beyond your control, like a serious illness or natural disaster.

Another avenue for relief is the First-Time Abate policy. This waiver may be granted if you have a clean compliance history, meaning you have filed all required returns for the past three years and have not had any penalties assessed during that time. To request penalty abatement, you can call the IRS, write a letter, or file Form 843, explaining why the penalty should be removed.

Beyond penalties, you must get back into filing compliance by submitting all overdue returns. This is necessary before the IRS will consider any payment plans or other resolution options. If you are missing tax documents from prior years, such as W-2s or 1099s, you can request a free wage and income transcript from the IRS for the relevant years.

These transcripts show the data reported to the IRS by third-party payers and can be used to prepare your past-due returns. Failing to file can result in a substitute for return (SFR) being prepared by the IRS, which often results in a higher tax liability because it does not include any deductions or credits you may be entitled to.

Requesting Innocent Spouse Relief

When a married couple files a joint tax return, both individuals are held equally responsible for the entire tax liability, even if they later divorce. In certain situations, one spouse may be relieved of this joint responsibility through Innocent Spouse Relief. This provision recognizes that it may be unfair to hold one spouse liable for tax understatement caused by the other spouse. There are three types of relief available: Innocent Spouse Relief, Separation of Liability, and Equitable Relief.

Innocent Spouse Relief may be granted if your spouse or former spouse failed to report income properly or claimed improper deductions, and you can demonstrate that you did not know, and had no reason to know, that there was an understatement of tax. Separation of Liability allows for the allocation of the tax debt between you and your former spouse. Equitable Relief is a flexible option that may be available if you do not qualify for the other two types of relief.

To request any of these forms of relief, you must file Form 8857, Request for Innocent Spouse Relief. This form must be filed within two years from the date the IRS first attempted to collect the tax from you. The form requires you to provide detailed information about your situation, including your financial status and your knowledge of the items that led to the tax debt.

After you submit Form 8857, the IRS will review your case. The IRS is required to contact your spouse or former spouse to inform them of your request and allow them to participate in the determination. The review can be a lengthy process, and if you disagree with the preliminary determination, you have the right to appeal the decision.