Turning your $20,000 Tax Liability to $0: Expert Tips for Tax Debt Resolution

Facing $20,000 or more in tax liability can be an overwhelming experience that can significantly affect your financial well-being. Many find themselves in this stressful situation due to a variety of reasons, ranging from simple mistakes to more complex issues like unexpected financial hardships. 

The consequences of carrying a heavy tax debt can impact credit rating and potential legal action. It’s essential to address these debts promptly and effectively. Resolving your tax liabilities not only alleviates immediate financial stress but also sets the foundation for a secure financial future.

In this blog, we will explore actionable strategies to transform your tax burdens into a manageable situation. Having a tax lawyer can help you secure the remedy that you need and prevent any legal issues from arising. 

What is Tax Liability?

Tax liability refers to the total amount of tax that you owe to the government, whether it’s federal, state, or local taxes. It is determined by applying the appropriate tax rates to your taxable income, which includes earnings from employment, investments, and other sources. This is the amount left after standard deductions and credits have been applied. It can accumulate over time due to several factors:

• Deferred payments: Choosing to defer payments can lead to accrued interests and penalties.

• Underpayment: If insufficient taxes are withheld from your salary or estimated payments are not adequate (common with self-employment tax or investment income), you’ll face a remaining tax due.

• Tax laws: Changes in tax laws may also affect your tax obligations unexpectedly, often catching taxpayers off guard.

Common Reasons People End Up with a High Tax Bill

Taxpayers often face common problems that trigger the accumulation of their tax debt. Here are some of the reasons that normal taxpayers experience:

• Underwithholding: This happens when too little tax is withheld from your wages or retirement distributions, leading to a large due amount at tax time.

• Incorrect filing: Mistakes in tax returns, such as incorrect or omitted income, can result in significant liabilities once audited or reviewed.

• Penalties: Late filing or payment penalties, accuracy-related penalties, and other charges can significantly increase your tax bill.

Steps to Accurately Assess Financial Standing and Tax Obligations

Ensuring you have all the necessary documents at hand simplifies the process of your tax return. It also helps prevent mistakes that could lead to penalties or increased tax debt. Here are some of the steps that can help you with the assessment of your tax liabilities:

1. Review your income sources: Gather data from employment, freelance work, investments, and other income taxes.

2. Calculate your total income: This includes all revenue streams for the fiscal year based on your tax records.

3. Identify deductible expenses and eligible credits: Understanding what tax deductions and credits you qualify for can help reduce your taxable income.

4. Estimate your tax liability: Use current tax rates and laws to estimate how much you owe.

This thorough assessment and documentation not only prepare you for tax assessments but also position you better to handle any disputes with tax authorities. You can also prevent or plan for future tax liabilities based on your financial records.

Exploring Tax Debt Resolution Options

Dealing with tax liabilities can be stressful, especially if you do it alone. However, the IRS and other tax authorities offer several programs for individuals and business owners. These can help manage and potentially reduce tax debt.

• Offer in Compromise (OIC): This program allows you to settle your tax debt for less than the full amount you owe. It’s an option when paying your full tax liability would create a financial hardship, considering the following:

1. Income,

2. ability to pay,

3. expenses, and

4. asset equity.

• Installment Agreements: If you’re unable to pay your tax debt immediately, this option lets you make monthly payments. There are several types of tax payments, tailored to the amount owed and the taxpayer’s ability to pay within an extended timeframe.

• Currently Not Collectible (CNC) Status: If the IRS determines you cannot afford to pay any of your tax debt because your living expenses consume your income and assets, it may place your account in a “Currently Not Collectible” status. While in CNC status, the IRS temporarily halts collections.

• Penalty Abatement: If you have a reasonable cause for not meeting tax obligations, such as unusual hardship or circumstances beyond your control, you may qualify for penalty abatement. It can reduce or eliminate penalties resulting from failing to file or pay on time.

Choosing the right tax relief option depends on several factors. It includes your financial situation, the amount of tax owed, and your future income prospects. It’s crucial to gather detailed information about your income, expenses, assets, and liabilities.

Each relief option has specific eligibility criteria. Having a tax expert can provide insights and guidance on which option might be the most beneficial for you.

Step-by-Step Guide on How to Apply for Each Tax Resolution Option

Here’s a detailed, step-by-step guide to help you understand and efficiently manage each application process, ensuring you meet all necessary criteria and submit your applications correctly.

1. Offer in Compromise

• Complete the necessary IRS forms (Form 656 and Form 433-A).

• Submit the initial payment (if required) and application fee.

• Await decision; continue to comply with all tax obligations during this period.

2. Installment Agreements

• Apply online through the IRS website or mail Form 9465, the Installment Agreement Request.

• Propose your monthly payment amount and due date.

• Once approved, ensure consistent payment by the due date each month.

3. Currently Not Collectible

• Provide documentation to the IRS proving that your expenses outweigh your income.

• Submit through a tax professional or directly via mail.

• Periodically update the IRS on changes to your financial status.

4. Penalty Abatement

• Request abatement via phone, in writing, or by using Form 843, Claim for Refund and Request for Abatement.

• Provide evidence of reasonable cause and lack of willful neglect.

A successful tax debt resolution requires careful planning, timely action, and professional advice. Each path has its processes and requirements, making it essential to fully understand your options before proceeding.

Conclusion

Regular financial reviews are critical to maintaining tax compliance and avoiding future liabilities. By reviewing your financial situation periodically you can determine any discrepancies before they become larger issues. As taxpayers, it is crucial to ensure that the amount of tax being withheld from your income is accurate according to your current financial status. Understanding the definition of tax liability can prevent underpayment or overpayment.

Addressing unpaid taxes proactively is not only a matter of financial responsibility but also essential for peace of mind and financial stability. It prevents the accumulation of debt and the stress associated with it. Contact J. David Tax Law today at  (888) 342-9436 to book your free consultation!

Taking early steps to resolve tax issues can save you from future complications and financial strain.