Simple Advice: How to Deal With Tax Debt

Have you received a tax bill? Are wondering how you’re going to pay it? Or are you behind on your taxes and struggling to keep up?

No matter your situation, all US citizens have legal options available to help them settle their tax debt.

Here is an overview of five common tax debt relief programs that are available for taxpayers. These programs can help taxpayers with their federal tax bills, tax penalties, debt on back taxes, and more.

1. IRS Payment Plan or Installment Agreement

This is the most common tax debt relief remedy that the Internal Revenue Service (IRS) offers taxpayers.

For taxpayers who need more time to pay their tax bill, you can speak to the IRS about a payment plan or installment agreement. You will need to qualify. These are two different options.

A payment plan allows you to pay back the taxes you will over time. Your total will also include any accrued interest and fees.

An installment agreement comes in two types: Short-term and long-term. Short-term plans come in either a 90 or 180-day option. Long-term payment plans are for those who need more than 180 days to pay off their tax debt.

Qualifications for a Payment Plan or Installment Agreement

You can apply online or contact the IRS by telephone to apply for a payment plan or installment agreement. Before applying, you must have already filed all of your tax returns.

Short-term payment plans are available to those who owe less than $100,000 in combined taxes, penalties, and interest. Your tax debt must be paid off in either 90 days, 180 days, or less.

Long-term payment plans are available for those who owe less than $50,000 in combined taxes, penalties, and interest. You also must need more than 180 days to pay your tax bill.

You can apply online using the IRS’s Online Payment Agreement Tool.

Other Requirements of IRS Payment Plans

You will continue to accrue interest and owe penalties on late payments. These will still accrue until your taxes, interest, and penalties are paid in full.
Taxpayers who owe more than $25,000 are required to make their payments via automatic withdrawals from a bank account.
Payments made with a debit card, credit card, or digital wallet are charged a processing fee. ACH payments drawn from a bank account are not charged fees.
The IRS charges a setup fee for your payment plan. Lower-income applicants may be eligible to have their setup fees waived.

2. Offer-In-Compromise

Another option for tax relief is what the IRS calls an “offer-in-compromise.” This is where you make a settlement offer with the IRS for less money than you owe on your taxes, penalties, and interest.

An offer in compromise is much harder to get the IRS to accept. However, you may get the IRS to agree if you can demonstrate that you absolutely cannot pay your tax debt. The IRS also may grant an offer in compromise if you can demonstrate that paying off your tax debt would create a financial hardship.

It should be noted that the IRS accepts fewer than half the requests they receive for an offer-in-compromise settlement.

In determining whether or not to grant a taxpayer an offer-in-compromise, the IRS considers several factors. Among them are a taxpayer’s ability to pay, their income and expenses, and how much they have in assets.

What to Know About Obtaining Tax Relief via an Offer-In-Compromise

A nonrefundable $205 fee is required. Low-income taxpayers may be granted a waiver.
Taxpayers must make a nonrefundable initial payment.
Taxpayers must be current on all their tax returns. A taxpayer who has not filed a tax return in a while may not qualify.
The IRS can file or keep tax liens in place until it accepts an offer in compromise. Taxpayers must also have fulfilled their end of the agreement.
Taxpayers who were already in an open bankruptcy proceeding will not qualify.
Taxpayers are allowed to hire a qualified tax professional to assist them with the paperwork. However, this is not a requirement.
Once a taxpayer has applied an offer-in-compromise, the IRS will suspend collection activities pending the outcome.

3. “Currently-Not-Collectible” Status

Taxpayers who cannot reasonably pay their taxes and their living expenses can request the IRS to place their account in “currently-not-collectible” status.

This is a delay in collection that taxpayers can request. Upon making this request, the IRS may ask taxpayers to complete a Collection Information Statement or a Collection Information Statement for Wage Earners and Self-Employed Individuals form. This helps the IRS verify the state of a taxpayer’s finances.

What to Know About Applying for a “Currently-Not-Collectible” Status

This is a temporary status. The IRS may review your income on an annual basis to determine if your financial situation has improved.
A “currently-not-collectible” status does not remove your tax debt.
Even with a “currently-not-collectible” status, the IRS can still file a tax lien against you.

4. Penalty Abatement

If the IRS has charged you a penalty for failing to pay or failing to file, you may be able to reverse it. You also may be able to reverse any associated interest.

The IRS has a reprieve called a “first-time penalty abatement.” You’ll have to meet certain criteria to receive this type of relief.

You can also likely qualify if you have requested an extension to pay, have paid your past taxes, or are currently participating in a payment plan. Just make sure you haven’t had any IRS penalties imposed during the past three years.

You can also receive a penalty abatement if you can show the IRS made an error in penalizing you.

The IRS also offers penalty relief for reasonable costs. For example, if you were unable to make a timely payment or file because of a life circumstance. This might be a serious illness, death in the family, or a natural disaster. To qualify, you will need to provide evidence and documentation. This might be hospital or court records, something that would substantiate the event that prevented you from filing or making a payment on time.

5. Hiring a Tax Relief Company

Taking on the IRS can sometimes be challenging and complicated. You have the legal right to hire a tax relief company. These services exist to help taxpayers. It may be as simple as understanding the process or getting help filling out forms.

However, there are many scam artists. Be aware of offers that seem too good to be true. Look out for promises such as getting money back or eliminating your debt in its entirety.

The Federal Trade Commission (FTC) recommends taxpayers to first try to settle their situation directly with the IRS.

What to Know About Choosing a Tax Relief Company

Remember that 50% of applications for “offers in compromise” are rejected by the IRS.
The taxpayer is ultimately responsible. If a tax relief company delays or loses your application, it’s still your responsibility for the tax debt, interest, and penalties you owe.
You may have to pay an upfront fee to work with a tax relief company. Often, it is a percentage of the tax you owe. The fee may be higher than what you might end up saving on your tax bill if the IRS accepts your offer in compromise. The fee may not be refundable if the IRS rejects your offer.

Things You Can Do Yourself for Free That a Tax-Relief Company may Charge For

Determining whether you have an outstanding balance with the IRS and in what amount. You can get up to five years of your payment history through your IRS account online. It’s easy to create one.
Getting your tax records. The IRS provides five types of free tax transcripts.
Setting up a payment plan with the IRS.
Finding out if you qualify for an offer in compromise. The IRS has a prequalification tool online.