The IRS can be a scary creditor. With the full might of the government behind it, the IRS can issue federal liens and levies against delinquent taxpayers, claiming paychecks and even taking homes. However, for most taxpayers, a debt with the IRS is far from the world’s end. There are a few ways to resolve your federal tax liabilities and be debt-free.
Does the IRS Forgive Federal Tax Liabilities?
Yes, and no. The IRS does not forgive a tax debt under normal circumstances. There is only one way to convince the IRS to relieve you of your supposed federal tax liabilities. Prove it is not your fault. More to the point, you must either prove that a tax liability discovered in a joint tax return was wholly your spouse’s fault or that the IRS made a mistake and that your tax return does not feature an error that might have led to your debt.
If you cannot seek forgiveness as an innocent spouse and cannot find the evidence to back up your claim that the IRS is wrongfully accusing you of federal tax liabilities (e.g., proving you qualify for a tax deduction the IRS is disputing), then you have very little recourse outside of paying up. You can take the IRS to court, but there are very few circumstances under which something like that might be worth doing.
While you can ask for an appeal before the IRS begins to act against your account, you have limited time to start pursuing legal action in a tax court. Before you take any drastic legal measures, you must seek the advice of a legal professional first. Thankfully, the IRS does not expect you to pay your debt with a single cheque or a suitcase full of cash. You have multiple payment options, most of which allow you to distribute your tax liability payments across a predetermined period.
Can I Settle My Tax Debt Over Time?
The IRS allows you to settle your current federal tax liabilities via a payment plan. These payment plans differ in scope and size but have a few prerequisites. The most significant provision is that you must be up to date with your current tax obligations and returns.
This means filing a tax return for every year you’ve missed (going back up to six years or more at the IRS’ request) and being on time with each of your monthly, quarterly, or biannual estimated tax payments (if you are self-employed and aren’t paying taxes through employer tax withholding). You must continue to pay and file taxes while you owe the IRS.
If you have multiple debts with the IRS, you can consolidate them into a single debt to pay it back. The critical requirement for entering a payment plan with the IRS is that you’re currently taking care of your ongoing tax obligations. Once this has been established, it’s time to consider your payment plan options.
Generally speaking, most indebted taxpayers qualify for a streamlined payment plan. This has no significant requirements and can be completed almost entirely online. Set up your payment plan via the IRS’ official website by logging into your tax account. A streamlined payment plan is available to all taxpayers with debts under $25,000.
You can still qualify for a streamlined payment plan if you owe more than $25,000 but at most $50,000. Still, under both examples, you must agree to a Direct Debit Installment Agreement (DDIA) or a Payroll Deduction Installment Agreement (PDIA). Streamlined installment agreements generally allow a taxpayer to avoid a federal tax lien if they organize their payment plan before the IRS decides to levy a lien.
However, depending on the circumstances of the debt, the IRS may still do so. The IRS must have direct access to your incoming funds. For debts over a total of $50,000, the IRS requires a more formal approach; you must fill out and file an Installment Agreement Request form and provide a detailed Collection Information Statement, going over your current financial information – assets, income, debts, and so on. You cannot opt for a non-streamlined installment agreement online. It must be done via paper and mail.
Most installment agreements begin with a maximum duration of 72 months or six years. You can opt to lessen the time of an installment agreement by adjusting your monthly payment. Missing a payment, or defaulting on your plan, can lead to a penalty and a lien or resumed collection actions. It may also be easier to qualify for another payment plan if you fill out a Collection Information Statement.
What If I Can’t Settle My Federal Tax Liabilities?
If you’ve done the math and figured that you could not pay your debt before it expires, you may be able to negotiate a partial payment installment agreement or a partial payment plan. A partial payment plan is made with the IRS with the understanding that you will be paying as much as you can each month until your debt expires.
Partial payment plans require a thorough financial analysis through a Collection Information Statement, so the IRS can verify that you cannot afford to pay off your debt before it reaches its end date. Partial payment plans are flexible because the IRS may require you to adjust your monthly payments if your finances improve considerably.
Alternatively, you can qualify for an offer in compromise (OIC). This is another payment plan made with the understanding that you can only pay part of your debt. However, unlike a partial payment plan, an offer in compromise is a fully realized payment plan negotiating a new basis for your debt based on your current finances.
People have successfully reduced large debts to a fraction of what they owe through an offer in compromise, but these success stories are rare. The IRS does not lightly agree to an offer in compromise, and the requirements for one may be stringent. Talk to a tax professional about your finances and debt before considering an offer in compromise.
What About Financial Indigency?
If you’ve reached a state of poverty or indigency, the IRS may declare your account in currently not collectible (CNC) status. This does not freeze your debt, but it does halt all of the IRS’ activities against your tax account – they will not attempt to collect anything from you until your situation improves. This also stops your debt’s timer, meaning it will not “age” while you remain uncollectible.
Once your financial situation improves, the IRS will resume collection actions. If you’re in debt to the IRS, don’t lose hope. Working with the IRS can be confusing, but there is an answer for every situation. Let us help you resolve your federal tax liabilities and become debt-free this holiday season.