You know you can’t avoid taxes. If you have a huge tax bill that you can not pay, life can feel pretty bleak. Falling behind on income tax payments is usually a bad idea. Furthermore, you owe the government money, and it will eventually catch on and hit you with a bill for what you did not pay with interest. And, oh, the more time you take, the worse the consequences.
In spite of one of the longest-running economic expansions on record over the last decade, millions of Americans continue struggling to pay their taxes.
Luckily, the IRS will sometimes work a deal with those who can demonstrate that they can pay taxes since they did not have the money, not since they were hellbent on cheating the government. The IRS offers alternatives for those individuals who want to settle their tax debt but are so trapped that they can not immediately pay what they owe. You need to understand the alternatives and select a strategy that works for you.
Practical tips for tackling that IRS debt
Pay the debt
This is the most prominent and fastest strategy to tackle your tax debt. If you have the money, then you should pay the debt. Ignoring the debt will only cause penalties and fees, and eventually garnishments and levies.
Instead of paying a lender per month, installment plans are like home mortgages; you pay the IRS per month.
A tax-payment installment strategy is an agreement with the IRS. You need to satisfy IRS requirements to enter the installment plan, including:
- Making the monthly minimum payments that the IRS needs
- The state income taxes and late charges are mostly paid
- Your tax returns are up to date
Being eligible for a tax installment is not always possible. The IRS, as a tax collection agency, often prefers receiving tax payments to not receiving them. However, it is also interested in entering a payment agreement with a truant taxpayer who cannot make the monthly installments.
If you have more than $50,000 arrears, the IRS will not deal with you. As long as you meet the debt criteria and have filed your past tax returns, the IRS will use a formula to derive a monthly payment.
Currently not collectible
The CNC can be very beneficial to you in the short term. If you are in dire financial situations, you might qualify. The IRS will evaluate your case and, if they assess your case and, if they determine you meet CNC criteria, will defer your tax debt and stop collections.
Although this is only a deferment, the IRS will reassess you in the future. After the CNC status is removed, you are once again responsible for the debt.
Offer in compromise
Sometimes, the IRS will consider a settlement that lets you pay a reduced amount of what you owe in back taxes, which is known as an offer in compromise. You should convince the IRS that you can not afford to pay what you owe and offer to pay the lowered amount in a considerable sum or short-term installments.
Although you may have seen television commercials suggesting that paying the IRS pennies on the dollar can be easily accomplished, ads like those are deceiving. The IRS has a distinctive form that you have to complete when proposing a compromise, and it charges a $186 filing fee. The form will require detailed information about your spending habits, income, equity, and any assets you might have in investments. If you are working for wages or yourself, you will also need to submit a collection information statement that is applied to evaluate your ability to pay.
In assessing your application, the IRS will consider your net worth and your credit card sources, such as home equity lines and credit cards. Then it will compare your income with your monthly expenses to evaluate what you can afford to pay per month.
Note you can not apply for a compromise if you have an open bankruptcy filing. If you are approved into a compromise agreement, you will have two years to settle your debt.
Hire a certified tax professional
There are numerous ways to find relief from tax debt. Hiring a certified public accountant or tax attorney is a good idea, mainly if your case is sophisticated. These professionals understand the laws, they know how to file with the IRS, and in some situations, actually have working relationships with IRS staff.
They will evaluate your situation and develop a strategy to manage your IRS debt. The greatest benefit of hiring a professional is less stress on yourself.
As a common principle, as long as your debt is less than $10,000, it is best to reach out to the IRS yourself to try to arrive at a payment agreement. If your debt exceeds that amount, but it is less than $25,000, you can seek advice from a lawyer or tax pro. If it is more than $25,000, contact a professional to help you in settling your tax debt
Release Wage garnishments
If you owe money and you have not reached a payment agreement, the IRS can move to garnish your wages. It can also garnish federal payments (tax refund, Social Security, etc.) till your tax debt is paid or the statutory duration limit for collecting has passed. If you have been hit with garnishment and can not afford to live on the money justify, you can reach the IRS to propose a modification. If the IRS accepts, the amount it garnishes may be lowered.
Innocent spouse programs
Provided you file a joint tax return with your spouse, even though you are legally separated, you can be held individually accountable for an underpayment. Since the IRS offers some relief for separated couples or married couples if a spouse or former spouse conceals a tax liability from the other.
If a partner can prove that the other failed to report income, took deductions, reported income improperly, or credits that were not permitted, the partner who was misled can seek relief from tax liability.
To be entitled to innocent spouse relief, you should be able to show that your spouse misled you by either taking deductions, not reporting income or credits that were not permitted. You have two years from the period the IRS first attempted to collect the unpaid taxes to file for relief.
The IRS enables two other provisions for couples with a tax reporting problem:
- Equitable tax relief is accessible to those who do not qualify for separation of liability relief or innocent spouse relief if they can show that something not reported on a joint tax return was mainly the responsibility of the other partner. Equitable relief can also be applicable when the tax reported on the joint return was accurate but was not paid with the return.
- Separation of liability relief provides an exemption for legally or divorced separated partners who have not shared a household for twelve months before a relief application. The relief applies to those who signed a joint tax return that understated how much was owed when one partner was not aware of erroneous info contained in return.
Innocent Spouse programs are sophisticated. The IRS provides a publication explaining the programs and a form that can be completed to seek relief.
Statute of limitations
The IRS will have ten years from the date of the evaluation, often soon after the filing date, to collect penalties, interest, and taxes. Tax lawyers and other tax advisors sometimes try to use the statute of limitations to resolve a tax case. Even though the IRS attempts to collect a tax debt, the taxpayer can file collection appeals to stall a lien, tax levy or seizure before the statute of limitations deadline.
Attempting to wait out the statute of limitations is a risky method. If you fail, your penalties and unpaid interest will have increased, and you will be liable for an even bigger payment to the government.
Other tax relieving options
If you take steps to reduce your tax debt to $50,000 or less, you will be eligible for an IRS installment payment plan. If you have credit cards, especially those that offer cash-back rewards, it might be wise to pay down your tax debt to $50,000 with plastic.
Racking up credit card debt that you can not pay within a month is usually a bad idea; however, if it enables you to avoid IRS penalties, it may work for you. Before you use credit cards for taxes, create a budget so you know you can afford to make payments. You should also consider discussing your strategy with a credit counselor or debt management.
Lastly, if you enter an installment agreement with the IRS, ensure you make all payments on time. The IRS is not patient enough with those who do not stick to their agreement, and it will impose penalties quickly and back interest on your tax debt.