Paying your taxes is unavoidable, and being responsible for paying a bill you can’t afford can be nerve-wracking. The IRS has reported a 50% drop in liens filed by the IRS since 2010, there are still a number of debt cases open as we crawl our way through 2020. Paying taxes can put a significant strain on you or your family’s finances, but it has to be done. Below are a few ways on how to settle IRS debt and regain your peace of mind.
First Time Dealing With Tax Troubles? Here’s How to Settle IRS Debt
Ignoring It Won’t Help
If you’re in debt to the IRS, they aren’t going to ignore that fact, and you shouldn’t either. No matter your ability to file on time or ask for an extension, the IRS will want the money you owe. Filing your taxes late incurs a 5% penalty of the tax owned per late month up to a maximum of 25% of the total balance. There is also an underpayment penalty of .5% to 1% per month, up to 25%.
As you can see, ignoring your tax debt can (and will) quickly cause your debt to skyrocket. Ignoring the problem for only a few months can have you owing 50% more than you did earlier in the year, putting you in a worse position than you were when you started.
Apply for an “Offer in Compromise”
The IRS is one of the most thorough and persistent debt collectors in the US, and they rarely forgive tax debts. Through filling out form 656, the application for an offer in compromise (OIC), you may be able to settle your tax debt for less than is owed. However, these applications are only ever approved if the person filing is experiencing severe financial hardship.
Are You Eligible?
To determine your eligibility, the IRS will assess your assets, ability to pay, income, and expenses to determine if you qualify for an OIC. The IRS will consider verifiable information regarding your investments, available credit, retirement plans, additional assets, and cash on hand.
Should you be able to demonstrate that you are unable to wholly fulfill your tax liability, the IRS may agree to an OIC. If you are currently going through bankruptcy court proceedings, you will not be eligible for an OIC.
Making Your Offer
Before you make an offer to settle your debt with the IRS through an OIC, you will need to file all of your tax returns that are due or past due. You will also be required to make all estimated tax payments for the current year. Once you meet the IRS’ stringent criteria, you will need to come up with a realistic payment plan that the IRS will look at.
Some situations in which you may be approved include experiencing catastrophic healthcare expenses, or you’ve lost your job and have few income-generating prospects for the future. Forgiveness is intended only for those who can prove severe financial hardship. Individuals who own property or have other assets are usually not approved. When you apply, you will need to choose one of the following payment schedules.
With a lump-sum payment plan, you can put a 20% down payment on the total offer you made when filling out the application. If your offer is accepted by the IRS, you will receive written confirmation by mail. If you choose this option, the rest of your amount will need to be repaid in installments of 5 or less.
If a lump sum won’t work for you, it’s possible to repay the IRS using monthly payments over a period of up to 24 months. Or, you can make monthly payments that will continue until you reach the statute of limitations regarding your tax debt. In this case, you will need to submit the first payment along with the application and continue making monthly payments until the IRS makes a decision on your offer.
Handle It Yourself
If you owe less than $10,000 to the IRS, you can usually handle the situation by yourself instead of paying for the expertise of someone else. Even if you’re not very knowledgeable on how to settle IRS debt, you can still successfully handle it yourself sometimes. One simple way to tackle the issue yourself is by filling out form 9465, the application for a payment plan, which can easily be done online.
The beauty of this service is that the IRS will automatically agree to a payment plan for any taxpayer who owes less than $10,000. Most often, the payment plans allow you to pay what you owe as well as any relevant penalties and interest, over a period of 3 years. This is usually your best option if your debt balance is low and you have a steady stream of income. However, just because you can handle it yourself doesn’t always mean that you should. Any mistakes on the forms you file can automatically disqualify you.
Hire a Tax Attorney
If you owe more than $10,000, you may want to consider hiring a tax attorney to handle negotiations with the IRS for you. The IRS has a variety of different payment plans for debtors owning more than $10,000, and your lawyer can help you get the best terms. They can also help you avoid credit-damaging tax liens.
Get Your Debt Streamlined
Another way to settle IRS tax debt is to get it streamlined. If you have a large amount of tax debt, you may be able to arrange a streamlined installment plan with the government. The Fresh Start program, which was initiated by the IRS in 2011, allows those with up to $100,000 in tax debt to be able to qualify for an installment agreement.
In order to take advantage of streamlining your debt, you need to file all of your past tax returns within the last five years. Also, you can’t qualify if you are filing for personal bankruptcy.
Not Currently Collectible Program
Under the Not Currently Collectible program, the IRS will voluntarily provide you with extra time (usually about a year) so that you can get your finances together. This program can be beneficial for debtors on the path to an IRS lien, levy, or seizure. Some taxpayers who are having significant financial issues can qualify for this program.
There’s no guarantee that the IRS will accept any settlement offer, but knowing your options can be incredibly helpful when you’re wondering how to settle IRS tax debt.
Finding out that you owe money to the IRS can be scary – especially if the amount you owe is significant and you’re not sure you’ll be able to pay in time. Luckily, there are several methods through which you can settle your IRS debt in a way that doesn’t leave you financially ruined. The IRS is one of the most persistent debt collectors in the US – if not the world – and ignoring your debt is the worst thing you can do.
If you have additional questions or concerns about dealing with the IRS or settling your debt, contact Geaux Tax Resolution in Lafayette, LA to schedule a consultation.