Reducing IRS Tax Debt

Reducing IRS Tax Debt: A Helpful Guide

Having a large tax debt owed to the IRS can feel overwhelming. The penalties and interest can quickly cause the amount you owe to balloon to intimidating levels. However, there are a number of strategies and options you can use to resolve IRS tax debt and get back on track financially.

Consider an Offer in Compromise

If you can demonstrate to the IRS that you’ll never be able to pay your full tax debt due to financial hardship, they may accept an offer in compromise (OIC). This allows you to settle your tax debt for less than the full amount owed[6]. Here’s what to know:

• You’ll need to fill out Form 656 and provide extensive documentation of your income, expenses, assets, and liabilities.
• The IRS will evaluate your overall financial situation to determine if an OIC is appropriate.
• Approval is not guaranteed – the IRS rejects a majority of offers.
• If approved, you may have to pay a lump sum or make payments over 5 months.

Because the IRS rejects many offers, it’s smart to work with a tax professional when submitting one. They can help put together the strongest case.

File for Bankruptcy

Filing for bankruptcy can sometimes eliminate tax debt, but it should be viewed as a last resort. Under Chapter 7 bankruptcy, tax debt from 3 years ago or longer may be discharged. Under Chapter 13, some more recent tax debt may be paid back over your bankruptcy payment plan. Things to keep in mind:

• You’ll still have to pay back any tax debt from the past 2 years.
• Your assets may be liquidated to pay creditors.
• Bankruptcy stays on your credit report for 10 years.
• Consult a bankruptcy attorney to understand if it’s the right move for your situation.

Request Currently Not Collectible Status

If you truly can’t afford to make any payments towards your tax debt currently, you may be able to get into “currently not collectible” status with the IRS. This puts a hold on collection activities as long as you remain in financial hardship. Interest and penalties continue to accrue, but the debt isn’t currently subject to collections. To qualify, you’ll need to show you can’t pay basic living expenses.

Use Credit Cards Strategically

Putting taxes on a credit card generally isn’t recommended, as it trades IRS debt for credit card debt. However, it can make sense in certain cases – like when it allows you to get under the $50,000 threshold for IRS payment plans. Just be sure you have a plan to pay off the credit card balance.

Take Out a Bank Loan

Borrowing from a bank or tapping retirement savings can provide funds to pay off IRS debt quickly before penalties and interest accumulate further. The interest rate and terms are often better than what the IRS charges. Pay off the loan ASAP so you don’t trade IRS debt for excessive bank debt.

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2024-03-21

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2024-03-18

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2024-03-15

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2024-03-15

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Avoid Shady “Tax Relief” Companies

Be very wary of tax relief companies that promise to easily negotiate with the IRS and settle your debt for pennies on the dollar. Most are scams. The IRS has strict rules around tax settlements, and it’s rare to get debt forgiven completely.

Know When to Seek Professional Help

If you owe less than $10,000, you may be able to handle negotiating with the IRS yourself. Above that amount, consider hiring a tax attorney or CPA to increase your chances of getting the best resolution. They can help with offers in compromise, payment plans, penalty abatement requests, and more.

Act Sooner Rather Than Later

It’s always better to address IRS tax debt quickly before penalties and interest have a chance to accumulate. The IRS may also be more likely to work with you if you take proactive steps to resolve the issue vs. waiting until they come collecting. Don’t delay – start researching your options today.

Dealing with IRS tax debt can be stressful, but know that there are always options to resolve it. Be proactive, explore payment plans, compromise offers, and professional assistance. With the right approach, you can take care of the debt and move forward.