How to Settle Your IRS Tax Debt: A Straightforward Guide
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Originally Posted On: https://shoppingkim.com/how-to-settle-your-irs-tax-debt-a-straightforward-guide/
April 15th is the same every year, but every year, it causes the same chaos. Many Americans wonder how they’ll pay their tax bill, even when their taxes come directly out of their paychecks.
Back in 2018, the IRS reported that 14 million Americans had a collective bill of over $131 billion in back taxes (including interest and penalties). It can happen for any number of reasons. Maybe you didn’t update your withholding information, or maybe the IRS found you don’t qualify for one of your deductions.
If you owe back taxes, then you will have to pay. But, you can work with the IRS to find a tax debt settlement.
Here’s what you need to know.
First, Don’t Ignore Your Tax Debt
Your first instinct may be to try to ignore your bill and pretend it doesn’t exist. But as with any other debt, like a mortgage or your car, the problem only grows worse if you try to pretend it’s not happening.
While American society tends to portray the IRS as some type of bogeyman, the reality is that the IRS is willing to work with you. Its primary interest isn’t to send you into debt or try to take your wages.
The IRS offers payment plans, but you need to ask for them.
It’s only if you ignore their letters that you’ll find yourself in truly hot water. Remember: unlike the banks, the IRS can garnish your wages and seize your property without a court order.
Make Sure You’ve Filed Your Taxes for Previous Years
Did tax debt from previous years stop you from filing again?
If you want help from the IRS, then you need to file taxes for each available year.
You won’t qualify for most IRS programs until you file. Why? Because the IRS want’s to know the full extent of our tax debt, and it can’t calculate this until you’re completely up-to-date.
So while it may not seem like it makes sense to file taxes for missing years when you can’t even pay for one tax year, it’s something you need to do.
Apply for a Payment Plan
The IRS wants to know that you can at least attempt to pay back your tax debt, which is why the agency offers payment plans.
IRS payment plans are an agreement with the IRS to repay your taxes in full over an extended time frame. Payment plans are very helpful if you owe a few thousand dollars and you simply don’t have the cash on April 15.
You can use a payment plan regardless of your credit score. And IRS installment plans don’t impact your credit.
However, you will need to pay interest and fees on the amount due. The short-term interest rate is 3%, but the long-term interest rate can create real problems.
If you owe $50,000 or more, then the IRS could offer you a long-term payment plan.
Should You Take out Debt to Pay Back the IRS?
Tax debt is stressful, and you might wonder whether it’s simpler to put your taxes on a credit card, take a personal loan, or borrow from a family member to pay your bill
The answer is different for everyone, but often, it’s cheaper to work with the IRS. The average APR on a credit card ranges between 15% and 20% if you’re lucky. Some APRs are as high as 26-28%.
If you only owe a few thousand dollars, then the IRS only charges you 3%. When you can’t pay your tax bill in one lump sum, then an IRS payment plan is usually the best option.
Ask for Forgiveness
A quick Google search will tell you that not everyone pays their tax bill in full. The IRS can settle your tax bill for less than what you owe through a program called Offer in Compromise.
This form of IRS tax debt relief allows you to make an offer to the RIS that’s less than your bill and agree to pay it over a “reasonable period of time.” It’s an option for those who either can’t pay their full bill or may suffer if they do.
The IRS doesn’t grant an Offer in Compromise to everyone. It looks at issues like:
- Ability to pay
In other words, if you can work out a comfortable payment plan with the IRS, then they expect you to stick with it. But if you have so many other obligations that you can’t pay your tax bill any time soon, then you can propose a number for the IRS to consider.
If the IRS accepts your offer, you pay back what you agreed to, and the IRS forgives the rest.
However, you must have first tried other payment options, including a standard payment plan.
Would you qualify for an Offer in Compromise? You can use the IRS’s pre-qualifier tool to determine your eligibility.
A Tax Debt Settlement Is Possible
Few things are more stressful than tax season, and finding out you have a tax bill is a huge financial blow.
Even still, you’re not alone. Millions of Americans struggle to pay their tax bill every year. And the IRS is prepared for that eventuality: it offers payment plans and tax debt settlement options for Americans that may face hardship when trying to settle their taxes.
You can get help to negotiate your tax debt. All you need to do is ask (and make sure all your tax returns are filed).
Are you on the hunt for more money advice? Check out our article on how to work from home to improve your personal finances.