Tax debt occurs when an individual or business owes money to the IRS but hasn’t paid the full amount by the due date. This can happen due to various reasons, including underpayment of taxes, missed deadlines, or incorrect filings. Tax debt can be stressful, leading to interest charges, penalties, and potential collection actions like wage garnishment or bank levies.
Tax debt is more common than many realize. In fact, the IRS reports that millions of Americans owe back taxes each year. But the good news is there are several IRS programs and options available to help taxpayers manage and reduce their debt, sometimes allowing them to settle for less or establish a payment plan over time.
IRS Debt Relief Options
IRS Payment Plans (Installment Agreements)
For those unable to pay their full tax debt immediately, IRS payment plans offer a way to spread payments over time. There are two main types of installment plans:
- Short-Term Payment Plan: For debts less than $50,000, taxpayers can set up a payment plan that lasts up to 180 days. It requires no setup fees if you pay directly from a checking account. However, interest and penalties will continue to accrue until the balance is fully paid.
- Long-Term Payment Plan: Also available for those who owe less than $50,000 and require more than 180 days to pay. Setup fees range from $31 to $225, depending on your income and payment method. If you owe more than $25,000, payments must be made via automatic withdrawals from your bank account.
Both payment plans provide immediate relief from IRS collection actions and allow taxpayers more time to manage their debt, though interest and penalties will continue to add up.
Offer in Compromise (OIC)
An Offer in Compromise is a program that allows you to settle your tax debt for less than the full amount owed. This can be an attractive option, but qualifying is difficult and based on your financial situation.
The IRS considers several factors when evaluating your OIC application, including:
- Your ability to pay
- Income and expenses
- The value of your assets
You may qualify for an OIC if paying your full tax debt would create significant financial hardship. However, you must be current on all tax filings and not be involved in an open bankruptcy case. If accepted, the IRS typically requires a lump-sum payment or a series of payments over 6-24 months.
Currently Not Collectible Status
For those experiencing extreme financial hardship, the IRS may temporarily halt collection actions by placing your account in a “Currently Not Collectible” (CNC) status. This does not eliminate the debt, but it can provide temporary relief while you get back on your feet. Interest and penalties will continue to accrue during this time.
To qualify, you must prove that paying your tax debt would leave you unable to cover basic living expenses. The IRS will review your income and expenses to determine if CNC status is appropriate.
Penalty Abatement
The IRS may reduce or eliminate penalties for taxpayers who can demonstrate a reasonable cause for failing to meet their tax obligations. Common reasons for penalty abatement include:
- Serious illness or injury
- Natural disasters
- Loss of income or other financial hardship
While penalty abatement can reduce the overall cost of your debt, interest on unpaid taxes usually cannot be removed.
How to Settle IRS Debt by Yourself
Assess Your Situation
Before taking any action, it’s crucial to understand how much you owe and whether you agree with the IRS’s assessment. Start by reviewing any notices from the IRS, which will outline your outstanding balance, penalties, and deadlines.
If you believe the IRS has made a mistake, you can dispute the debt by filing an appeal or submitting additional documentation to prove the inaccuracy.
Choose the Right Option
Depending on your financial situation, choose the relief option that best suits your needs. If you can afford to pay off your debt over time, a payment plan might be the simplest solution. However, if you’re facing extreme financial hardship, you may want to apply for an Offer in Compromise or request CNC status.
Filing for an Offer in Compromise
To apply for an OIC, you’ll need to submit IRS Form 656 and provide detailed financial information, including your income, assets, and liabilities. There is a $205 application fee, though this can be waived if you qualify as a low-income taxpayer.
Be prepared to make an initial payment of 20% of your offer if you opt for a lump-sum settlement. For periodic payment offers, you’ll need to submit the first installment with your application. While the IRS evaluates your offer, they will suspend collection actions, giving you time to manage the process.
Applying for Installment Agreements
You can apply for a payment plan online through the IRS website or by calling them directly. To speed up the process, be ready to provide personal information, tax returns, and financial data. Automatic monthly payments via bank withdrawal are often required, especially if you owe more than $25,000.
The benefit of an installment agreement is that it allows you to chip away at your debt while avoiding aggressive IRS collection actions like liens or levies.
Common Pitfalls to Avoid
Failure to File Returns
One of the most common mistakes is failing to file a tax return, even if you cannot pay the full amount. The IRS imposes hefty penalties for non-filers, so it’s always best to file your return on time and request a payment plan afterward if needed.
Incomplete or Incorrect OIC Applications
Offer in Compromise applications require detailed financial information. Ensure all forms are complete and accurate, as submitting an incomplete application can result in rejection or delays.
Ignoring IRS Notices
Never ignore IRS notices. The IRS may escalate collection actions, including garnishing wages or placing liens on property, if you fail to respond promptly.
When it comes to tax debt, taking no action is the worst action—dealing with it quickly is the best option.
When DIY Is Not Enough
While it is possible to resolve tax debt on your own, there are situations where professional help is recommended. If your tax situation is particularly complex, or if you owe a large amount, consider working with a tax attorney or an IRS-enrolled agent who specializes in tax debt relief.
These professionals can help you navigate IRS procedures, handle paperwork, and even negotiate on your behalf.
Final Thoughts
Dealing with tax debt can be overwhelming, but the IRS offers several programs to help you manage and even reduce your debt. Whether you choose to set up a payment plan, apply for an Offer in Compromise, or temporarily suspend payments due to financial hardship, the key is to take action as soon as possible.
By confronting your tax debt and choosing the right relief option, you can avoid the stress of mounting penalties and interest while getting back on the road to financial stability.
