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What if you cannot pay back a tax debt in full?

Many Minnesota residents make painstaking efforts to plan personal budgets and finances. However, no amount of preparation can account for unexpected, drastic changes in income or expenses. Knowing this, a person can fall behind on financial obligations. Along the way, a person could also fail to meet his or her tax burden.

Although a person may not intentionally try to come up short on a tax bill, the Internal Revenue Service will still be aggressive about trying to collect any back taxes. In this situation, it might not be exactly clear what to do or what options are even available.

According to the IRS, people who are under financial distress may have the ability to reach a settlement known as an offer in compromise. Under this arrangement, a person can satisfy a tax debt without being required to pay back the full amount owed.

Although an offer in compromise might be a great option, a person must still receive approval from tax officials. After extending a payment offer to the IRS, an individual's unique financial situation will be considered, which means that income, financial obligations and asset equity will all be taken into account.

In addition to making an offer to the IRS for what portion of an outstanding debt will be paid back, individuals can also choose how it will be repaid. Depending on specific circumstances, a person can pay the IRS in lump sums or monthly payments until the debt is satisfied.

Of course, trying to take all of this information into consideration can seem daunting. After all, an individual might not have a solid understanding of what kind of offer the IRS will accept or decline. By seeking trusted answers, the hope is that a financially distressed individual can put together a reasonable offer to the IRS in order to take an important step forward.

Source: Internal Revenue Service, "Offer in Compromise," accessed March 6, 2014

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