Thanksgiving is a time for gratitude, and a time for reflection, as we draw closer to winter and a new year. For many people, the end of the year is a great time to wrap up loose ends and prepare for a fresh start. That means taking care of old debts and liabilities. Being in debt is never a great feeling. But being in tax debt is often worse. While the government stops short of breaking your legs, it can be a ruthless creditor.
Organizations like the IRS can command high-interest rates and hefty penalties for ongoing late payments and missed returns. Staying on top of your duties as a taxpayer is your responsibility, and if you mess it up, you pay – sometimes even with jail time. But thankfully, there are tax debt relief offerings available that are worth considering, and sometimes even at a lower-than-expected cost. It’s all about knowing your options – and using them effectively.
Understanding Your IRS Payment Options
First and foremost, let’s bust some myths. There is no such thing as complete tax debt forgiveness. The IRS will find a way to collect money from you, even if you currently have none. Depending on the size of your debt, the IRS will be more or less aggressive about pursuing your account, and there are a few factors that might affect just how much they invest in coercing payment from you.
Tax debt can expire, but that expiration date is on hold if the IRS has no way of collecting from you. And if you do have enough funds to spare or assets left, the IRS may pull directly from your bank accounts and personal belongings to fulfill your debt. To begin with, the only way to get the IRS off your back without paying them is to prove that the debt isn’t yours. Otherwise, you will want to look into the next best thing: paying them quickly and with minimum penalties. This is where IRS payment plans come into play. The IRS offers three significant categories of payment:
- Pay everything now.
- Pay within a short period (180 days).
- Pay via monthly installments (more than 180 days).
Short-Term vs. Long-Term Payments
Short-term payments can be made via check, bank transfer, or online. The sooner you make a payment, the better – while the IRS gives you ample warning of any penalties or developments in your account via notices and letters, there’s no surefire way to stop the IRS from continuing to penalize you without resolving your debt entirely. Long-term payments are more complicated, depending on what you owe.
If you owe $50,000 or less, you can enter a streamlined installment agreement if you agree to automatic withdrawals from your chosen debit account. At $25,000 or less, your requirements for a streamlined installment agreement lessen, and you can make payments yourself and even avoid a federal tax lien. The lower your debt, the easier the process becomes. Streamlined installment agreements are accessible online and don’t require a significant setup fee.
If you owe more than $50,000, the IRS will only accept a payment plan with a filled-out Collection Information Statement, alongside a hard copy Request of Installment Agreement, sent via mail or through your nearest IRS field office. This is a non-streamlined installment agreement. All installment agreements boil down to the same thing, by default – a 72-month agreement that splits your debt into 72 equal payments, due every month.
You can reduce the agreement’s length by agreeing to larger monthly payments at a higher risk of default. If you owe a significant sum, the IRS requires financial information through a CIS to accurately determine your installment agreement eligibility. Depending on your debt circumstances and the amount you owe, an installment agreement can be a path toward a rescinded tax lien even if you still need to finish paying off your debt. This can tremendously aid your financial stability and your credit options.
First-Time Penalty Abatement
Your principal debt is often the most significant chunk of what you owe the IRS, but that can change over time. Different penalties can add up, and when calculated with interest, you may end up owing far more than when the IRS first assessed your debt. Thankfully, if your track record has been otherwise impeccable for at least the past three years, you may be eligible for first-time penalty abatement.
This means you can shave off your penalties and accrued interest and focus only on the principal debt. Only some people are eligible for first-time penalty abatement. You need to prove past compliance (meaning you have a clean record for at least three years) and current compliance (which means you’re up to date on all current outstanding tax payments, as well as all of your returns, and are in a payment plan for your outstanding debt).
Furthermore, first-time penalty abatement is not valid for all penalties – it only works on failure to file, failure to pay, and failure to deposit penalties. If these factors apply, you should seek first-time penalty relief via Form 843, Claim for Refund, and Request for Abatement. Or call the IRS through one of your notices or letters, and ask them about abatement directly.
Seeking Other Forms of Tax Debt Relief
Depending on your circumstances, you may have other ways to deal with your current tax situation. Taxpayers in dire financial straits may utilize an offer in compromise to drastically reduce what they owe – although it’s not a consistent option, and the IRS often rejects these offers. If your tax debt is close to a decade old, you may be able to negotiate a partial payment plan if it is all you can afford.
If you have no other tax debt relief options to explore, the IRS can postpone any and all collection actions and mark you as currently not collectible, although your debt won’t expire in that time, either. And if it turns out that your tax debt is your ex’s fault, you may even seek partial or total relief through an innocent spouse relief program. Don’t spend another year in debt. Take care of your tax debt this month, and work with us to find the best possible action plan for your case.