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.

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 quicklyPenalties 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.