7 Tips for Resolving Tax Debt: A Taxpayer's Guide

It can be incredibly stressful trying to resolve tax debt, but with the help of a tax professional and these 7 tips, you can get back on your feet.

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Both state and federal governments take tax debt very seriously, to the point of levying criminal charges on those who willfully ignore their taxes or attempt to illegally evade their responsibilities as taxpayers. But for the vast majority of Americans, tax debt is a consequence of simple clerical errors, missed deadlines, missed payments, and financial hardship.

Thankfully, both state and federal tax authorities are usually understanding of most tardy taxpayers’ circumstances – provided they are forthcoming and cooperative.

However, state authorities and the IRS alike can switch attitudes on a dime – and have the means to aggressively pursue a person’s tax liability far beyond most other creditors.

Regardless of the size of your debt or what authorities you’re indebted to, when it comes to tax debt, there is one central tip: deal with it quickly. Penalties and interest rates for tax liabilities tend to be steep, and tax debts take a long time to expire. Furthermore, the government can postpone expiration through tolling periods and by coercing you into an extension agreement. Don’t let this fight drag out.

How the Government Responds to Tax Debt

Years of weakened funding means the IRS has become a little choosier with whom it pursues – but they do try and collect on every debt they can.

When the IRS notices that a taxpayer has a discrepancy on their account, missed a payment, or has otherwise incurred a negative balance, they will provide a bill and deadline to cover the liability – failing to respond, and missing the deadline, will begin the IRS collection process.

The IRS will aggressively pursue larger debts – but that doesn’t mean that your smaller tax debt can’t quickly grow into something that catches the IRS’s interest, especially if you decide to drag your heels for too long.

State authorities are much quicker to notice a debt and typically begin collecting actions sooner than the federal government. In both cases, tax authorities escalate through a number of steps, starting with a tax lien to secure their legal claim on your assets and accounts and culminating in a levy against your accounts, assets, and wages to cover the liability.

Tax liens and levies are the strongest tools in the arsenals of the IRS and state tax authorities, allowing them to effectively supersede other creditors and take what is owed. However, tax authorities give you ample warning before beginning such drastic collection actions.

In the past, a federal tax lien used to be a black mark on your credit score, comparable to a bankruptcy. The IRS has since changed this. Credit reporting companies no longer factor public liens into an individual’s credit score – however, missing payments on a loan due to a lien or debt with the IRS can adversely affect your credit.

Tips for Resolving Tax Debt

Regardless of whether your debt amounts to the total cost of a fancy dinner or a five-figure sum, the one thing you need to pay the most attention to is time.

Neither state authorities nor the IRS tend to dawdle when the opportunity presents itself to collect on a debt. Their terms are often less favorable than those of most other creditors. Our first tip would be to try and figure out an installment plan as soon as possible.

Enter into a Payment Agreement As Soon as Possible

There are steep penalties and interest rates for failing to file a tax return and failing to pay an outstanding tax debt. These penalties and interest rates compound over time and can drastically increase the size of your debt.

First-time tax debtors can seek to excuse the penalties and reduce the interest rate by entering into a payment plan. Payment plans and installment agreements may be handled differently from state to state, but when dealing with the IRS, taxpayers have the choice of either:

- - Paying everything at once.
  - Paying in multiple lump sums within 120 days (negotiable up to 180 days under certain circumstances).
  - Paying in monthly installments (until the debt is completely paid, or expires, whichever comes first).

There are limited setup fees for starting an installment plan with the IRS, and the IRS will generally agree to any plan as long as it allows you to settle your debt before the statute of limitations (10 years from the tax debt assessment date, plus tolling periods).

Consider working with a tax professional to determine how much you should pay on a monthly basis to avoid falling behind on your payments. Missing payments can cause you to default on your plan, increasing your interest rate (and subsequently increasing your debt). As a result, your debt continues to grow at a reduced interest rate while you’re paying it off.

Learn About Offers in Compromise

If you have determined that you don’t have the financial means to pay off your debt, you may be able to get the IRS to agree to an offer in compromise. This is essentially a system to help taxpayers write their debt off by paying as much as they reasonably can within the debt’s lifetime.

The kicker is that the IRS will review the information that you send them and information gathered from other sources to determine just how much you can pay. And if your offer undercuts what they think you can pay, it will be rejected.

Work with a Tax Debt Professional

It is best to consult a tax professional when tackling a debt with your state or federal tax authorities – especially if you’re unsure how to pay it off.

An offer in compromise must be considered very carefully because your debt will continue to grow while the IRS deliberates your offer – meaning a rejection translates into even more time spent waiting before you can start paying your debt off.

Get Your Tax Returns Professionally Reviewed

One of the prerequisites for any payment plan is to be completely up to date with your tax returns. If your debt was the result of a delayed or erroneous tax return, to begin with, you might want to consider a professional tax preparation service as well. This can help you avoid similar issues in the future and can help you meet your tax return deadlines – and remove yet another headache.

Don’t Fall Behind on Payments

Once you’ve entered into a plan with the IRS or your state authority, you cannot fall behind. There are severe penalties for being late on your payments.

Lift Your Liens and Levies

Entering into a payment plan with the IRS can be your first step towards lifting a lien, as well as avoiding further collection actions. The IRS will continue collection actions if you default on your plan or stop paying.

If you are under financial duress, you can contact the IRS to halt collection actions temporarily. This will not stop interest rates, nor will it lift the lien. But it will prevent a levy. Note that being marked as not collectible counts as a tolling period, extending your debt’s lifetime.

Tax Debt Can Expire (Eventually)

There are different tolling periods that can extend a tax debt’s 10-year lifespan. These include:

- - Being out of the country for a long time
  - A military deployment of over six months
  - Being currently not collectible
  - Litigation
  - Bankruptcy proceedings
  - A few other key periods where the IRS and other tax authorities are blocked from taking certain actions against your account

If you’re in trouble with the IRS, don’t hesitate to seek help in figuring out your next steps, call Rush Tax Resolution today.

I Owe Money to the IRS, What Do I Do?

If you owe money to the IRS, you may feel helpless and unsure of what to do, but you have options. Our tax professionals can help you find a solution that works for you.

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You might feel like IRS debt puts you in a hopeless or even shameful situation but let us assure you that it doesn’t. Over 11 million Americans owe back taxes to the IRS, and sometimes, something as simple as missing a single tax return or being late with your payment can trigger a minor debt that builds up into something greater over time. Thankfully, there are ways to resolve a debt to the IRS, even after years of penalties and interest.

If you owe money to the IRS, the first thing to know is that there are very few ways to fully cancel your debt. The IRS will expect payment in some shape or form – but given the right circumstances, you can greatly delay when you must pay, or reduce your debt significantly. Let’s explore each of your options.

What Are My Options If I Owe Money to the IRS?

There are three general forms of recourse available to taxpayers who owe money to the IRS. These are:

- - Short-term or long-term payment plans or installment agreements,
  - An offer in compromise to reduce the debt, and;
  - In rare cases where you feel an error has been made, you can seek an appeal and argue against your tax liability.

Depending on how large your debt is, and how long you’ve gone without paying the IRS, you may be subjected to different collection actions, which include liens and levies. There are different ways of dealing with these collection actions, too.

If you owe money to the IRS, the first thing to do is to get up to date on your tax returns. If you haven’t filed in a while, you will need to make sure you’re back up to speed, or you won’t be able to seek certain forms of debt reduction, nor complete a payment plan with the IRS. Keep in mind, if you are self-employed or must otherwise make estimated tax payments, then making sure you continue to make your payments is also important, even if you can’t pay off your debt yet.

Seeking a Reduced Debt

If you cannot afford to pay off your debt within 120 days, nor afford to make monthly payments for six years or until your debt expires, then the IRS may be persuaded to an offer in compromise.

This is an offer the taxpayer must prepare and send alongside an initial payment. The IRS can either accept the offer or reject it. Interest continues to accrue while the IRS deliberates the offer in compromise, so making an offer the IRS is likely to accept is important.

Many factors go into the IRS’s deliberation of an offer in compromise. The most significant factor is your reasonable collection potential (RCP) based on your expendable income over a certain period, and the total value of any non-exempt assets you own at their quick sale value (QSV) or liquidation value. The IRS offers an online pre-qualifier tool to help taxpayers weigh their options but note that it is no guarantee that the IRS will accept your offer.

Penalty Abatement

Under certain circumstances, first-time taxpayers may be able to request penalty abatement from the IRS when seeking to pay their back taxes. This would remove additions from your owed tax such as penalties, fees, interest, and even certain taxes. The circumstances for a penalty abatement are quite strict, and the requirements for filing the right form can be confusing. A tax debt professional can help you navigate your options for abatement.

Tax debt professionals are your best option for formulating an effective and reasonable offer in compromise. They know what to look for in a person’s financial past and circumstances, and how low the IRS will be willing to bring the debt. Offers in compromise are never a guaranteed option but may be the best one available to taxpayers with no hope of consistently making monthly installments to eliminate their debt in a few years’ time.

Arguing Against Your Liability

While rarely an option, some taxpayers receive a tax liability they did not deserve due to an error on the IRS’s part. A tax professional can help these taxpayers bring their evidence to the IRS’s Independent Office of Appeals or the US tax court and argue doubt as to liability.

For example, the IRS might have sent you a revised tax bill after deciding you did not qualify for a certain deduction. You can appeal this decision and provide the necessary evidence to prove that you are qualified for the deduction.

What Happens If You Don’t Pay?

If you owe money to the IRS and ignore your tax debt for long enough, the IRS will begin to pursue specific collection actions against you. The government is within its right to use these actions to leverage taxpayers to pay, and its ability to seek payment outstrips that of any other creditor. The two most significant tools at the IRS’s disposal are liens and levies.

Liens can be leveraged almost immediately after you’ve missed your deadline for paying your back taxes, depending on the size and nature of your tax debt. A tax lien is a legal claim on all your property, effectively allowing the government to call dibs on everything you own until you pay your debt.

This isn’t a physical claim of any assets or accounts but does interfere with your ability to secure a loan using your property as collateral or liquidate assets without first paying your tax debt.

Levies are a physical claim of an asset, property, or a portion of your monthly wages. The IRS can make your employer withhold a portion of your wages every month if you are eligible, empty out a bank account, or claim an asset such as a secondary vehicle or non-primary residence, until your debt is paid. Collection actions such as levies can be avoided or worked around in certain ways, such as declaring yourself currently not collectible.

How Rush Tax Resolution Can Help

Qualified tax professionals can get you out of trouble with the IRS, not just by helping you navigate around the IRS’s rules and collection actions, but by advising you on the best possible path towards debt resolution.

Experienced tax attorneys know how the IRS works, and how the government leverages collection actions against indebted taxpayers. If you owe money to the IRS, Rush Tax Resolution will work with you every step of the way to get back into a good standing with the IRS, and even reduce the amount you owe.