5 Ways Your IRS Tax Debt Can Be Settled For Less than What You Owe
It seems like everyone is suffering from debt problems. We hear a lot about credit cards, student loans, mortgages, and car loans. What about back tax payments due to the IRS? It can be especially intimidating to owe money to the government. As a government agency, the IRS has quite a bit of power to go after your assets and collect on tax debt. The IRS can garnish your wages or place liens on your property. The sooner you come to a resolution with the IRS, the better!
My Dad didn’t teach me very much about money. This is probably one of the reasons why I’m still paying off quite a bit of debt right now. He did teach me, by his own example, to make my own rules when it comes to many different aspects of life. For example, he would always tell the hostess at a restaurant where he wanted to sit. Most people just inform the hostess of how many are in their party, then follow obediently to whichever table. My Dad would request tables by the window, or away from sources of noise, or away from air vents that would blow on my food. He would get up and switch tables if he was unhappy. This habit of his could be annoying or even a little embarrassing at times. However, my Dad taught me that you always have options and you don’t have to settle with the first offer.
What does my Dad have to do with IRS debt? Dealing with the government can be scary, but the amount of your tax debt can cause even more anxiety. It’s good to keep in mind that there are ways to avoid paying back the full amount owed. There are multiple strategies that anyone can use to decrease, and sometimes even eliminate, their tax debt in order to settle up with the IRS.
Offer In Compromise
An offer in compromise involves an agreement between a taxpayer and the IRS, to settle for an amount less than the total tax debt that is owed. These types of agreements are highly fact specific. You must have some type of special circumstances to obtain an offer in compromise.
You are a good candidate for an OIC if you have high taxpayer’s liability but low ability to pay. You also must have no delinquent returns and you must not be in an open bankruptcy.
Innocent Spouse Relief
Maybe the tax debt isn’t even your own doing? The innocent spouse relief is a somewhat complicated, but interesting provision for escaping from tax debt. It applies where “your current or former spouse should be solely responsible for an erroneous item or an underpayment of tax from your joint return.” You must not have known of your partner’s tax understatement so it would be inequitable to hold the innocent spouse responsible.
Statute Of Limitations
Did you know that there is a time limit on the IRS when it comes to collection of tax debt? The government is only allowed to collect on tax debt for 10 years from the date of assessment (in most cases). However, the IRS usually takes action in the form of a tax lien or levy even before you reach this long. There are also exceptions like filing an OIC, tax return past due date or bankruptcy.
IRS Installment Agreement
One of the biggest issues with most kinds of debt is the accrual of interest. The IRS will charge interest on your tax debt if you can’t pay it off. There is a way you can stop the growth of any amount you owe, without needing to come up with enough money to pay off the full balance right now. If you owe up to $50,000 in back taxes, you will be able to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. This can be accomplished through an installment plan. You will have to make monthly payments until the full amount of your debt is paid off and pay a one-time user fee. Though penalties are reduced, interest will continue to accrue on the outstanding balance.
This is a good move even as a temporary solution while you are considering other options. This will stop the IRS from taking further actions because it shows the taxpayer’s willingness to cooperate.
Filing for Bankruptcy
When debt gets really bad, bankruptcy is your last option. It’s worth noting that while bankruptcy doesn’t cover all types of debt (ex. student loans), income tax debt may be eligible for discharge with a bankruptcy if you meet the requirements. This would mean that your assets will be liquidated as necessary to pay for as much of your debt as possible. If you don’t have enough assets, you are no longer held responsible for your unpaid balance after discharge.
Chapter 13 Bankruptcy on the other hand is a payment plan approved by the court to repay your debt with the goal to pay them off in full.
Dealing with Tax Debt
Do not ignore your tax debt.The IRS has collection rights that regular creditors do not. Do not delay your IRS tax problems. If you are still undecided on how to combat your debt, file for an extension and be prompt on filing your return even if you cannot pay what you owe. This is to make sure you do not incur unnecessary and preventable charges.
Be RealisticDon’t push for an IRS tax debt solution that is not applicable to you. Tax debt forgiveness is possible if you are truly experiencing financial hardship. There are also tax debt relief companies that will help you professionally by going through all of your past tax dealings to suggest the best course of action according to your unique financial situation.
Ultimately, the best approach is obviously to avoid tax debt. You can prevent many issues such as incorrect tax return preparation by asking for help from a professional. However, if it’s too late for that, take some comfort in the knowledge that you have options. Your situation might not be as bad as it seems. The most important thing is that you deal with it right away.