Dealing with tax debt can be overwhelming. Whether caused by financial setbacks or errors in filing, owing money to the Internal Revenue Service (IRS) is a burden that requires careful attention. Ignoring tax debt can lead to penalties, interest and even legal actions such as liens or wage garnishment. If you owe back taxes to the IRS, several options are available to help you navigate the repayment process.
What tax debt relief is
The IRS offers several options to accommodate different financial circumstances, such as payment plans, offers in compromise and penalty relief programs. These solutions aim to make repayment feasible without causing undue hardship.
If you feel overwhelmed by IRS notices or the complexity of navigating tax regulations, it may be wise to seek professional assistance. Tax settlement services specialize in negotiating with the IRS to secure favorable outcomes, such as reduced penalties or extended repayment terms. While these services can alleviate some of the stress associated with tax debt, they often come with significant fees and require careful vetting to ensure legitimacy.
Tax debt relief options
The IRS provides a range of programs designed to help taxpayers meet their obligations without experiencing undue financial burden. The best option for you will depend on your unique financial situation, income, expenses and ability to repay.
Payment plan
One of the most commonly used options is a payment plan, which allows you to repay your debt in manageable monthly payments.
The IRS offers a short-term payment plan if you can pay off your tax debt within 180 days. However, interest and penalties will continue to accrue until your balance is fully paid. You can make payments through various methods, such as online transfers, checks or money orders. This option works well if you need breathing room to settle your tax debt quickly, and there is no setup fee.
If you need more time to pay off your tax debt, you can set up a long-term payment plan called an Installment Agreement. With this plan, you can make monthly payments over an extended period — often up to 72 months or more, depending on your situation. There is a setup fee, but it may be reduced or waived if you qualify as a low-income taxpayer. Like the short-term plan, interest and penalties will continue to accrue until the debt is paid in full.
Offer in compromise
If you cannot pay the full amount of your debt, an offer in compromise is a potential solution. This lets you settle your debt for less than the full amount owed if you can demonstrate financial hardship or prove that paying the full amount would create an undue burden. However, qualifying for an offer in compromise can be challenging. The IRS evaluates each application rigorously, considering your income, expenses, assets and overall financial situation. They generally approve an offer in compromise when the amount offered represents the most they can expect to collect within a reasonable period.
You’re eligible to apply for an offer in compromise if you:
- Are not currently in a bankruptcy case
- Filed all the required forms
- Made all the required payments
- Have a valid extension for the current year’s return if you’re applying for the current year
- Are an employer who has made tax deposits for the current and past two quarters before applying
Currently Not Collectible (CNC)
Another relief option is the Currently Not Collectible (CNC) status, which temporarily halts IRS collection actions for taxpayers facing severe financial difficulties. Under this status, you are not required to make payments until your financial situation improves. However, the debt remains, and interest and penalties continue to accrue. CNC status is particularly beneficial when dealing with temporary setbacks, such as job loss or medical emergencies.
Penalty relief programs
Penalty relief programs can help if your primary concern is minimizing tax penalties rather than the principal tax debt.
One way the IRS offers penalty relief is through an administrative waiver. You may be eligible for relief through an administrative waiver if it’s your first tax penalty or if you meet other criteria allowed under tax law.
The most common administrative waiver is called First Time Abate. You can receive First Time Abate relief for failing to file, failing to pay or failing to deposit.
Penalty relief is not offered to everyone and requires an adequate history of tax compliance to qualify. You are considered to have a good tax compliance history if you have filed the same return type for the past three years before the penalty and didn’t receive any penalties during the three years before. You are also considered to have a good tax compliance history if the penalty was removed for an accepted reason other than First Time Abate.
Tax settlement services
Tax settlement services offer to help you resolve your tax debt with the IRS by negotiating payment plans, penalty abatements or offers in compromise on your behalf. These services offer expertise in navigating the often complex IRS procedures, potentially increasing your chances of achieving a favorable outcome. By handling all communication with the IRS, they can alleviate much of the stress you might feel when dealing with tax debt.
However, tax settlement services come with some downsides that you should consider. These services often charge high fees, which may not be reasonable if your tax debt is relatively small. While their expertise may be valuable, no company can guarantee specific results, such as reducing debt or securing an offer in compromise.
Proceed with caution, as the industry has its share of scams. Some companies make false promises or charge upfront fees without delivering results. Working directly with the IRS might be a more cost-effective solution. If you hire a tax settlement service, research thoroughly to ensure you’re working with a legitimate and reliable company.
Other ways to pay off tax debt
For those who do not qualify for IRS relief programs or prefer alternative resources, there are other strategies to consider for managing tax debt. Personal loans, credit cards, home equity and debt consolidation programs are all potential solutions to becoming debt-free.
Personal loan or credit card
One option is to take out a personal loan or use a credit card to pay off the debt. By paying your tax debt in full using a personal loan or credit card, you can stop the IRS from imposing penalties or interest or initiating collection actions like liens or levies. However, high interest rates on loans or credit cards can lead to greater financial strain if not managed carefully.
Home equity
Another potential solution is using home equity. If you have significant equity in your property, you can take out a home equity loan or line of credit to pay off your tax debt. This method often provides lower interest rates than unsecured loans, but it comes with the risk of losing the property if payments are not made.
Borrowing from retirement
Borrowing from retirement accounts, such as a 401(k) or IRA, is another way to access funds for paying off tax debt. While this can eliminate IRS penalties and prevent aggressive collection actions, it reduces retirement savings and may incur taxes and penalties on early withdrawals. This strategy should be approached cautiously and used only as a last resort.
Debt consolidation
Debt consolidation programs offer another alternative: combining multiple debts, including tax liabilities, into a single payment plan. This approach simplifies financial obligations and may provide more favorable repayment terms than the IRS offers. However, these programs may require collateral, and the extended repayment period can increase the total cost over time.
Signs of a tax relief scam
Tax debt relief is a legitimate need, but the industry is rife with scams that prey on vulnerable taxpayers. Identifying the warning signs of a scam can help protect against financial harm. One major red flag is a company or individual guaranteeing specific results, such as approval for an offer in compromise. The IRS evaluates each case individually, so no legitimate service can promise a particular outcome.
Another common tactic scammers use is demanding significant upfront fees before providing services. Reputable tax professionals and firms typically explain their process and fee structure, allowing you to make informed decisions. High-pressure sales tactics are another indicator of a scam. Ethical companies will not rush clients into signing contracts or making payments without fully understanding their circumstances.
Some scammers may impersonate IRS agents and claim to have knowledge of your case or threaten legal action if you do not comply with their demands. Always verify such claims directly with the IRS. A legitimate company will provide a comprehensive overview of potential solutions rather than steering you exclusively toward their paid services. If you suspect a scam, report it to the Federal Trade Commission (FTC) or your state’s consumer protection agency.
The bottom line
While the prospect of owing money to the IRS can be intimidating, the agency offers a variety of programs designed to help you meet your obligations in a manageable way. Options range from payment plans and offers in compromise to penalty relief and Currently Not Collectible status. Tax settlement services can provide expertise and support, but they should be chosen carefully to avoid scams.
If you do not qualify for IRS relief programs, explore alternative strategies, such as personal loans, home equity loans or retirement account withdrawals. Each option has its risks and benefits, so it’s essential to evaluate which approach best aligns with your financial goals and repayment ability.
To prevent future tax debt, consider creating a long-term financial plan that includes adjusting withholdings, setting aside funds for taxes and staying informed about filing requirements. By taking these steps, you can resolve your tax debt and lay the groundwork for a more secure financial future.
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