What is a tax lien? A tax lien is a legal claim that can be filed in court by a federal agency against a person or business who owes taxes. Tax liens are typically linked with money or property to pay the taxes. The list of properties with tax liens are maintained in the courthouse of the county for reference, and for dealing with legal issues that may be brought up in the future. These are documented and dated properly to avoid legal complications.
Properties are subjected to taxes on an annual basis for their value. There are many people who do not pay their taxes on the stipulated date, incurring taxes because of financial issues or because they misplaced the tax bills. If you pay your taxes late, then federal government may seek investors to create a balance in the budget. Tax Liens can be filed for income taxes, unemployment taxes, sales taxes, real estate excise taxes, Social Security or disability taxes. Once the tax lien is settled, you need to deal with a certain amount of court-related paperwork just for the discharge of your property.
Many investors invest on tax liens in the hope of making profit, but you must make sure you have covered all your bases and have researched everything about the properties before going all out. If you are an investor, you can avoid complications and disastrous investments just by discussing your future plans with a qualified professional.
Your first step should be to build a profitable blueprint of your investment, as well as the purpose of the tax lien you are procuring. Doing this whenever you think of making an investment will let you answer your most critical questions, like why do you want to invest in tax liens in the first place? In addition, you will see the direction in which your money is going, and you will be able to decide the best course of action in relation with your investment.
The business of tax lien auctions gained popularity because of the number of investors that can smell big money coming from the real estate market. However, doing this during a time of stock market plummet in the real estate sector may not be the wisest move. Those who have already invested on tax liens are compelled to seek other ways through which they can obtain even a meagre return of investment. However, some investors still maintain that a positive outcome will come in time, if the investor is willing to gamble on slow but long-term profit potential. You need only to learn the basic principles of investing and strengthening your position in the tax lien business.
Most people do not have any idea that there is a method to pay off overdue IRS taxes for a fraction of the amount owed. The method can be complicated if you do not have a basic understanding of taxes, but fortunately there are many tax professionals available who can help you file the necessary paperwork to reduce or eliminate your tax debt.
To settle your tax debt with the IRS, you need to file what is know as an “Offer in Compromise” or an OIC. An OIC is simply an offer to the IRS for less than the full amount of taxes owed that shows the IRS that you have a special circumstance that will prevent you from ever paying the full tax amount (and yes, not having enough money is a special circumstance). The offer to settle your tax debt can contain one large payment or multiple payments over the next few years.
An Offer in Compromise, once accepted, will stop the IRS from garnishing your wages or from forcing a sale of your assets to pay the taxes you owe them. An OIC is basically an agreement between you and the IRS stating that you will make the payments as stated in the offer and that the IRS agrees to leave you alone to do so.
In order to qualify to make the IRS an Offer in Compromise, you need to meet one of the Internal Revenue Services’ conditions. The IRS states that you need to meet at least one of the following three conditions in order to file an OIC:
- Doubt as to Collectibility
- Doubt as to Liability
- Effective Tax Administration
We will break down each condition (remember you only need to meet one of these conditions):
1. Doubt as to Collectibility. This is the most common condition met. It simply means you can not afford to pay the debt and it is unlikely that you will ever be able to. You will need to fill out a personal financial statement (or have a professional fill one out for you) that will show the IRS that you can not afford to pay the taxes you owe.
The IRS has a formula that will help you and your professional determine how much of the tax you will need to pay. You then make an offer to settle your IRS debt and if the offer is accepted the remaining balance of the taxes owed will be forgiven. The offer can be a one time payment or a series of payments that you will make over a period of time. As long as you make the scheduled payment or payments, you will not hear from the IRS regarding the collection of the tax again.
2. Doubt as to Liability. To meet this condition, you will need to raise some doubt that you actually owe the tax. There will need to be a strong issued raised that will show it is not you that was responsible for the tax. For most people who have a problem with overdue personal federal income taxes, it will be hard to meet this condition.
3. Effective Tax Administration. Like number two above, for most people this condition will not be one they can meet. To meet this condition, you will need to show that you have special circumstances that would create an economic hardship.
Anyone who owes the IRS more than they can afford to pay should consider submitting an Offer in Compromise. It should be noted that saying you can’t afford to make any payments at all because you are broke, will not be a reason accepted by the IRS to settle your debt. You will need to submit to the IRS a viable payment plan that you can prove you will be able to fulfill, so there will be no need for them to come after you for late payments in the future.
We recommend that you hire an experienced professional to help you with this process. You generally only have one opportunity to make an offer, so you will need to have someone on your side that knows what the IRS will and will not accept as settlement for your debt. Most professional will give you an idea of what you will need to pay the IRS before they charge you any fee for their help. So if you owe back taxes, you should begin your search for an experienced professional to help you.