Can I add a "Paid in Full" statement to my check to the IRS?

The 1st two post are correct, it wonâ€™t work. As a matter of fact if you mixed up payments and for example sent the IRS your mortgage payment and the mortgage company your tax payment. The IRS will over stamp you check United States Treasury and deposit it, even if your mistaken payment is much more than your back tax payment.

The governments viewpoint is everybody else has to pay their taxes, why are you any different? What is probably eating you alive is penalty and interest. While penalties can be forgiven under extenuating circumstances, interest is mandated by law.

There are only 4 ways that I know of to pay less than the full amount you owe;
Bankruptcy, offer in compromise, partial payment installment agreement, and the statute of limitations expiring.

Bankruptcy- a chapter 7 bankruptcy can wipe out back taxes if they are old enough. While a chapter 13 bankruptcy wonâ€™t wipe out back taxes, you are protected by the bankruptcy court; the IRS has to freeze penalty and interest while you are in the plan. When you emerge from chapter 13 you will still owe the government but you should now be able to pay them, unfortunately the statute of limitations is on pause while you are in a chapter 13 plan.

Offer In Compromise- donâ€™t believe the late night TV commercials about this one. The OIC program was designed to enable taxpayers who canâ€™t pay their back taxes a fresh start. You will need package 656, this can be downloaded from the IRS website or they will send you one if you request. There are 2 types of plans, lump sum and payments. If you choose the lump sum plan (plan can include up to 6 payments), you have to submit 20% of your offer with the plan or make the payments you propose. With the payment plan you must make the payments you propose. With either type it can take up to 2 years for IRS to accept or reject your plan, if they reject, they keep your 20% down payment or your monthly payments and apply it to what you owe and the statute of limitations is paused while IRS makes a decision. IRS is much more conservative with OICâ€™s than say owing a credit card company and offering less than what you owe. A good rule of thumb is if you wouldnâ€™t accept the offer they wonâ€™t, even if you would accept the offer they probably wonâ€™t If they think they have good odds of collecting the full amount the will reject your offer.

Partial Payment Installment Agreement- with this program IRS will make you fill out a form similar to a loan application called a collection information statement. With the CIS the IRS will analyze your finances and determine the payment they think you can afford. You will have to give them most of your income but after 5 years its over and any unpaid balance is forgiven. With this program the statute of limitations does not get paused and continues to run.

Statute of Limitations- IRS has 10 years to collect the amount you owe from the time you file. For most people this is the due date of the return so, if you file returns late the statute start when you actually file. Some things like bankruptcy or OIC will extend the statute while you are in the program. IRS starts to really get tough when the statute is nearing an end, this is when they will do things like attach your wages or in extreme cases seize property.

None of these options are really good ones. The best thing you can do is buckle down and throw money at the problem and eventually it will go away. You also need to think about what caused you to have these tax problems in the first place, and fix that problem so you wonâ€™t owe in the future. If you need to have your withholding increased do it, if you are self employed make your estimated tax payments, file your returns on time especially if you owe. If you do these things you will minimize the penalties, which will decrease the amount you owe. Hiring a good tax professional to prepare your return will save you much more than it costs you. Fixing the problem is even more important than paying the back taxes.

The more you owe the more aggressive they are about collecting. The most liberal terms are if you owe less than 25k, they really get tough if you owe more than 100k or if you owe business trust fund taxes (employers quarterly and unemployment returns). You may want to visit your closest Taxpayer Assistance Center or contact the Taxpayer Advocate (both are listed on IRS website, or toll free will tell you the closest one to where you live).

Good Luck