What Is Tax Resolution & How Does It Work?

Tax resolution is the process of addressing and resolving outstanding tax liabilities or disputes with tax authorities like the Internal Revenue Service (IRS) or state tax agencies. It helps individuals and businesses manage or settle tax debts, including reducing the amount owed, negotiating payment plans, or finding legal ways to reduce tax burdens. The goal is to provide relief to taxpayers by helping them navigate complex tax laws and regain financial stability.

Understanding Tax Resolution

Tax resolution is a negotiation process with the IRS or state tax authorities to settle tax debts or resolve disagreements. It provides a pathway for taxpayers facing financial difficulties due to unpaid taxes, aiming to prevent severe collection actions like tax liens, levies, or wage garnishments.

Taxpayers may seek resolution for significant unpaid taxes, unfiled returns, or audit disputes. Ignoring tax issues can lead to accumulating penalties, interest, and legal actions. Engaging in tax resolution allows taxpayers to proactively address these problems.

Common Tax Resolution Programs

Several tax resolution options are available, each with specific purposes and eligibility criteria. These programs provide relief based on a taxpayer’s financial situation and the nature of their tax debt. Understanding these options helps address tax issues.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles a tax liability for less than the full amount owed. This option is considered when a taxpayer cannot pay their full tax liability or doing so would create significant financial hardship. The IRS considers ability to pay, income, expenses, and asset equity when evaluating an OIC.

The IRS may accept an OIC based on three grounds: doubt as to collectibility, doubt as to liability, or to promote effective tax administration. Doubt as to collectibility means the IRS believes the full amount cannot be collected due to the taxpayer’s financial situation. Doubt as to liability arises when there is a genuine dispute about whether the tax debt is accurate or legally owed. Effective tax administration may be a basis if collecting the full amount would cause economic hardship or be unfair due to exceptional circumstances. The IRS will not accept an OIC if the taxpayer can pay through an installment agreement or other means.

Installment Agreement (IA)

An Installment Agreement (IA) is a payment plan allowing taxpayers to pay off tax debt in monthly installments over a specified period. This option suits taxpayers who cannot pay their debt in full immediately but can make regular payments. The IRS allows taxpayers to pay their debt over up to 72 months, or six years.

To qualify for an IA, taxpayers must be current on all tax filings. Interest and penalties continue to accrue on the outstanding balance during the installment period. Installment agreements can be streamlined for certain debt amounts, offering a simpler application process.

Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status is a temporary designation where the IRS determines a taxpayer cannot pay tax debt due to financial hardship. This status temporarily halts IRS collection efforts, such as levies or garnishments. The taxpayer must demonstrate an inability to meet basic living expenses if they were to pay their tax debt.

While in CNC status, the IRS will not actively pursue collection, but interest and penalties continue to accrue on the outstanding balance. The IRS periodically reviews the taxpayer’s financial situation to determine if their ability to pay has improved. To be granted CNC status, taxpayers must provide extensive financial information, including income, expenses, and asset details.

Penalty Abatement

Penalty abatement involves having penalties removed or reduced by the IRS. Penalties can arise from various reasons, including failure to file, failure to pay, or inaccuracies on a tax return. Taxpayers can request penalty abatement based on several common grounds.

One common ground is “reasonable cause,” which applies when a taxpayer can show they acted responsibly but were unable to meet tax obligations due to circumstances beyond their control. Examples of reasonable cause include serious illness, death in the family, or natural disasters. Other grounds include statutory exceptions or administrative waivers, such as the first-time penalty abatement policy for certain penalties if specific criteria are met.

Other Relevant Programs

Beyond primary resolution programs, other options exist for specific situations. Innocent spouse relief can relieve a taxpayer from paying additional tax, interest, and penalties if a spouse or former spouse understated taxes on a joint return without the requesting spouse’s knowledge. This relief applies when the requesting spouse had no reason to know about the errors when signing the joint return. The IRS examines various factors, including the nature of the error and the requesting spouse’s financial situation.

Initiating the Resolution Process

Beginning the tax resolution process requires specific initial steps to address tax issues. This phase focuses on preparing the taxpayer for engagement with tax authorities.

A foundational step involves ensuring all required tax returns are filed. The IRS requires taxpayers to be in compliance with filing obligations before considering resolution options, meaning all past-due returns must be filed.

Understanding the full extent of the tax liability is another early action. This involves reviewing tax returns, financial records, and correspondence from the IRS to identify all outstanding issues, including penalties and interest. Obtaining tax transcripts from the IRS provides a detailed account of a taxpayer’s tax history and liabilities.

Communicating with the IRS is also part of the initial process. This might involve responding to notices or proactively contacting the agency. Ignoring IRS notices can escalate problems and lead to more severe collection actions.

Financial disclosure is necessary for many resolution options, particularly for Offers in Compromise or Installment Agreements. The IRS requires detailed information about a taxpayer’s income, expenses, and assets to assess their ability to pay.

Selecting a Tax Resolution Professional

Choosing the right professional to assist with tax resolution is important. Several types of professionals are authorized to represent taxpayers before the IRS and state tax agencies: Enrolled Agents (EAs), Certified Public Accountants (CPAs), and tax attorneys.

Enrolled Agents are federally licensed tax practitioners specializing in taxation with unlimited rights to represent taxpayers before the IRS. CPAs are state-licensed accounting professionals who provide a wide range of services, including tax preparation and representation. Tax attorneys are legal professionals specializing in tax law who can represent clients in court and offer legal advice on complex tax matters.

When selecting a professional, taxpayers should look for specific qualifications and experience. It is beneficial to choose someone with a proven track record in tax resolution cases similar to your situation. Credentials, transparent fee structures, and positive client reviews are also important. Ensuring the professional maintains continuing education and adheres to ethical standards.