The IRS is not an organization you want to be on the wrong side. Even bankruptcy can’t save you from tax debt. And if you decide to wait it out and let your debt expire, the IRS is well within its rights to claim your paychecks and your assets to satisfy the overdue balance on your account. Long before that, they can issue a public lien on everything you own, taking precedence over other creditors and locking you out of countless financing opportunities. Thankfully, the requirements for getting rid of your tax debt are straightforward: payment. Worry not; your tax relief payment options are far from limited. Let’s explore how tax accounts can resolve their due balance with the IRS.
You Have Back Taxes – What Now?
First and foremost, it’s essential to establish your tax assessment date. This is the date listed on the IRS’s notice regarding your overdue balance. This date is critical because, barring any tolling periods, it is the date on which your debt will expire ten years from now. Tolling periods are when the IRS cannot collect your debt or enforce collection. These range from being on tour for the military to filing for and being involved in an ongoing bankruptcy case. Tolling periods freeze time on your debt’s collection statute, meaning ten years can become twelve or more. Until your debt expires, the IRS can resort to different methods to incentivize or coerce payment, including penalties, interest, and collection actions.
In addition to the initial notice of overdue tax payments, the IRS will also issue a warning regarding penalties accrued on your tax account. Failure to pay taxes by the deadline on your notice will result in a penalty of 0.5 percent of your total unpaid taxes each month, up to 25 percent. Your debt can also accrue interest. Interest rates are determined by the IRS’ quarterly federal short-term interest rates, plus three percent. That is typically more than what you’d pay on a bank loan, so you are incentivized to take care of your tax debt quickly. Your payment options are defined by the IRS’ payment plans.
Navigating IRS Payment Plans
IRS payment plans come in three primary offers: pay now, pay within 180 days, or pay in monthly installments (for longer than 180 days). Setting up a payment plan online is easier and cheaper than any other method. Still, there are eligibility limits – you need to owe less than $50,000 to set up an online installment payment plan and less than $100,000 to set up an online short-term payment plan.
Full Payment
Paying in full requires no setup fee or ongoing penalties and interest. You can pay by check, money order, via debit/credit, through the Electronic Federal Tax Payment System (EFTPS), or through a checking/savings bank account via the IRS’s Direct Pay function.
Short-Term Payment Plan
Short-term payment plans require you to complete payment within 180 days via multiple lump-sum deposits. Again, there are no setup fees, online or otherwise. You will continue to accrue penalties and interest until the debt is fully paid.
Long-Term (Installment) Payment Agreement
An installment agreement may be their best hope for a financially feasible payment plan for taxpayers whose debt might have taken them by surprise. Installment agreements cost money to set up, depending on whether you’re opting for a direct debit plan (wherein the IRS makes automatic monthly withdrawals from your account) or a manual payment plan. Direct debit plans only cost $31 to set up online and $107 to set up via phone or in-person (for debts over $50,000). Paying off your own volition drives up the price for online setup to $130 and $225 otherwise.
Low-income taxpayers may have their fees waived if they opt for direct debit or need only pay $43 for a manual payment plan (this fee may be reimbursed later). To qualify as a low-income taxpayer, your adjusted gross income must be at or below 250 percent of the federal poverty level. Form 13844 helps taxpayers determine eligibility as low-income applicants. Setting up an installment agreement online is the easiest way to get started on your debt payment. But suppose you are ineligible for an online payment plan. In that case, you must print and fill out Form 9465, Installment Agreement Request, and may be required to fill out Form 433-F, Collection Information Statement, for further financial information pertinent to your payment plan.
What If You Don’t Pay?
Failing to address your tax debt with the IRS puts you at risk for collection actions. The IRS’s most powerful collection actions include filing a public notice of tax lien and issuing levies on your wages, assets, and properties. A tax lien is a legal claim on everything you own, taking precedence over other creditors. This makes it harder to liquidate assets, pay off debts, or secure a loan without first talking to the IRS. A tax levy is a physical claim on an asset, account, or a portion of your monthly wages. While a lien is one-time and continuous, a levy claims one asset or account at a time, and the IRS may resort to multiple levies to satisfy your debt.
Jail Time
Technically, not paying your taxes is a crime. It’s not a crime to be behind on payments or struggle to meet ends. But it takes a lot to push the IRS towards threatening jail time. Willfully ignoring the IRS’ attempts to communicate with you and set up a payment plan will lead to a wage levy or asset seizure long before the IRS thinks of putting you behind bars. While avoiding your taxpayer duties is illegal, the IRS only pursues intentional tax evasion and clear cases of criminal activity or financial fraud, rather than threatening every taxpayer who has made a mistake on their return with a felony charge.
What If You Can’t Pay?
In theory, the amount of tax you owe never exceeds the amount of money you make. But personal and financial circumstances can change on a dime, and as we’ve mentioned earlier, the tax debt can accumulate. If you find yourself in the unfortunate position where you owe the IRS more money than you can afford to pay now, you’re not entirely out of options yet. The government may be a powerful creditor, but it isn’t a loan shark. Partial tax debt forgiveness exists in the form of an offer in compromise. You can propose this payment plan to the IRS based on your financial situation and what you can afford to pay within a reasonable period.
To set up an offer in compromise, you need to figure out what you can afford to pay every month (based on your income after taxes) and what you can manage to liquidate. The IRS considers this your reasonable collection potential (RCP), minus exempted assets (such as your own home and roof) and some cash. In addition to your offer, you may need to forward financial information to back up your projected RCP. If the IRS thinks you can pay more based on your provided info (and information gathered through other sources), your offer will likely be rejected. If approved, an OIC can help you minimize your debt and keep the IRS from resorting to levies and asset seizures.
If you cannot apply for an offer in compromise and suffer from financial hardship, your only option may be to qualify as “currently not collectible temporarily.” This will halt all collection actions, but it does not keep penalties and interest from accruing. While offers in compromise used to be much tougher to qualify for, they still aren’t a guaranteed form of debt reduction. It’s highly recommended to consult a tax professional before you draft your offer in compromise.
