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5 Ways to Deal With Your IRS Debt

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  • There are several ways to resolve tax debt directly with the IRS, including payment plans and offers in compromise.
  • Professional assistance is available to negotiate on your behalf for a fee.
  • Tax relief services may also help, but they can be very expensive.

Many people who file taxes look forward to the process because they expect to get a refund. Others find themselves owing money. Falling behind on tax payments and being in debt to the IRS can be extremely stressful. But even if you can’t immediately pay your tax bill, there are ways to resolve your tax debt.

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5 strategies to deal with IRS tax debt

If you are behind on your taxes, it may be tempting to ignore the issue. That’s a bad idea. 

Chad Cummings, an attorney and CPA, recommends opening and responding to all IRS correspondence promptly. “Ignoring letters or notices from the IRS can worsen the situation,” says Cummings. “Prompt attention to these communications can prevent additional penalties or interest, and may also provide insight into the nature of the tax issue, which could be a simple clerical error.” 

If you have a clear understanding of your tax debt situation, the strategies below could help you move forward. 

1. Installment agreements

The IRS offers installment agreements, or payment plans, which can help you get caught up on your back taxes over an extended timeline. 

You’ll only qualify for a long-term repayment plan if you need more than 180 days to pay your tax debt and owe less than $50,000. If you agree to set up automatic withdrawals for a long-term monthly repayment plan, you’ll have to pay a $31 setup fee. But if you don’t want to make automatic withdrawals, then you’ll face a $130 setup fee. Neither long-term installment agreement waives the penalties and interest your tax debt balance may accrue. 

Under a short-term payment plan, you pay the amount owed within 180 days. There is no setup for for short-term payment plans. Only individual taxpayers can apply for a short-term payment plan online.

You can apply for an installment agreement directly through the IRS website. But you can also apply over the phone, in person, or through the mail. 

When you apply, you’ll have the ability to choose your own monthly payments, within limits. The IRS will ask how much you can afford to pay each month, with the expectation that you’ll pay as much as possible to avoid unnecessary penalties and interest. But if you choose an amount that’s too small, your minimum payment will be the amount you owe divided by 72.

The main advantage of an installment agreement is that you can get back into the good graces of the IRS by signing up for relatively affordable monthly payments. If you can afford to make the minimum payment and qualify for the deal, an installment agreement could be the right move. But if you owe more than $50,000, an installment agreement won’t work. 

2. Offer in compromise

An offer in compromise gives you an opportunity to settle your tax debt for less than the balance you owe. But it’s only an option if you cannot pay your full tax liability or would face financial hardship by paying your tax debt. 

When you apply for an offer in compromise, the IRS considers your ability to pay, income, expenses, and asset equity. If you offer to pay what the IRS can expect to collect within a reasonable time period, then the agency might approve your offer. 

Of course, the ability to settle your tax debts for less than what you owe is alluring. But while you might see advertisements that tout an offer in compromise as an easy solution, that’s not true. It’s a complex route filled with paperwork through which you must prove that paying your taxes in full would cause financial hardship. The burden of proof can make it difficult to obtain approval for an offer in compromise. 

If you would truly be in financial hardship due to paying your taxes in full, then an offer in compromise might be the right solution for your situation. 

3. Professional assistance

The tax code can be murky, especially to anyone unfamiliar with all of the rules. Instead of trying to navigate dark waters on your own, consider enlisting the help of a tax professional. Tax professionals can include tax attorneys, CPAs, or enrolled agents. A competent tax professional can guide you through the process of dealing with your tax debt. 

When you work with a professional, they often take over communications with the IRS. For some taxpayers, this means you’ll hand off the negotiations to a professional. 

In general, working with a tax professional can help you get through an otherwise stressful process. Additionally, getting professional help can help you avoid the temptation to ignore the situation.

“Don’t procrastinate — while you should not panic — procrastinating usually only makes things worse,” says Hubert Johnson, tax attorney at Guardian Tax Law

A downside to getting help is that you’ll have to pay for the assistance. If you are struggling to pay your tax bills, coming up with the funds to pay a tax professional might seem out of reach. But if you can affort it, hiring a vetted professional could be well worth the expense. 

4. Penalty abatement

If you don’t pay your taxes on time, you can face penalties, which are added to your total balance. Both your overdue taxes and penalties accrue interest. Unfortunately, the accruing interest can lead to a significantly higher debt over time. 

The good news is that the IRS offers penalty abatement options. In other words, the IRS can waive the penalties and associated interest for some taxpayers and infractions.

If you missed a tax deadline for the first time, then you might be eligible for a First Time Abatement. For example, if you failed to file, pay, or deposit your taxes by the deadline, you might be able to have the penalty waived if you have a history of good tax compliance. Good tax compliance typically involves filing on time for the last three years and not receiving any other tax penalties in the last three years. 

You can request penalty abatement over the phone. Be prepared to provide information about the penalty you want relieved and any communication you received from the IRS. If the penalty abatement isn’t approved over the phone, you can file a Form 843 to request the relief in writing. 

Anyone who has incurred IRS penalties due to back taxes should consider making a request for penalty abatement. While the opportunity is only available for some types of penalties, it never hurts to ask for this helping hand. 

5. Tax relief services

If you are worried about your tax bill, you’ve likely noticed advertisements for tax relief services. Essentially, these tax relief services take over your communication with the IRS. The goal of hiring a tax relief service is to help you negotiate a better deal with the IRS. 

There is no guarantee that a tax relief service will be able to get you a better deal than you’d be able to obtain on your own. And if you opt to work with a tax relief service, make sure to thoroughly vet the company. You’ll want to choose a reputable one with a track record of successfully negotiating with the IRS. 

Unfortunately, many tax relief companies offer services with a hefty price tag. Some may charge a percentage of the amount you owe to the IRS. Others charge hourly fees that can ultimately amount to thousands of dollars, depending on how complicated your case is. Depending on your situation, paying the fee could leave you even further in debt. 

These are some of the leading tax relief services you might consider:

How to deal with tax debt FAQs

The IRS has up to 24 months to consider your offer in compromise. While it might not always take 24 months to receive an answer, expect to wait at least a few months for a decision. 

The cost of hiring a tax relief service varies based on the company. Some tax relief companies might charge you an hourly rate between $100 and $1,000. Or you might have to pay a percentage of the amount you owe to the IRS. 

Yes. You can choose to negotiate your tax debt directly with the IRS. But you have the option to hire professional assistance if you want to. 

You might qualify for IRS penalty abatement if you didn’t file a return in the last three years, paid all of your taxes due, or filed an extension for filing. Additionally, you might receive penalty relief if you are facing a difficult situation, like a natural disaster or death in your immediate family. Whether or not you are eligible, you can call the IRS to find out if you qualify for abatement. 

An IRS installment agreement can span up to 72 months. But you can choose to shorten this timeline by making larger monthly payments. 

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