If you owe the IRS money and you’re not sure what to do, you’re probably wondering how to deal with the IRS quickly and effectively to resolve the problem.
In this article, we’re taking a look at how to deal with the IRS so you can get out of the red and move forward with confidence.
How to Deal with the IRS
Over 14 million Americans owe back taxes to the IRS, to the tune of more than $125 billion. While the IRS does not have the means nor the manpower to go after these debts the way it might have a few decades ago, millions of taxpayers continue to worry about their taxes – and continue to struggle with paying them back.
Paying a debt to the IRS is not like paying a debt to any other creditor. Tax debts can haunt you long after the financial grave, being one of the few liabilities that, under certain circumstances, aren’t wiped out by personal bankruptcy. Furthermore, there are very few ways to reduce your debt to the IRS, let alone try and seek debt forgiveness. If you owe the government taxes, the first and most important piece of advice is simply this: don’t dawdle.
Do Not Ignore Your Tax Bill
Unlike most creditors, the IRS reserves a special toolkit for collecting debts. Its collection process is nearly unavoidable, and its penalties and interest rates are very harsh – to the point that they seemingly encourage taxpayers to seek financing methods to try and pay their debt before it gets out of hand.
These penalties include a failure to pay a penalty of 0.5 percent of the original tax owed after the due date for each month that the tax remains unpaid, up to a total of 25 percent.
Added to this is a steep interest rate that varies depending on whether you are currently in a payment plan with the IRS or not, and additional penalties and fines for failing to file a tax return (which some taxpayers do, erroneously thinking that there might be no point to filing a return when they can’t pay their debt).
Underneath a certain dollar amount, the IRS will not take considerable collection actions against you. But once you reach their threshold, they can begin restricting your access to financing and taking priority over other creditors through a federal tax lien, before moving on to more drastic options.
To this end, many taxpayers may be better served to seek a loan to repay their debt while they still can, versus ignoring their liability.
Understand Your Options
When owing money to the IRS, your options are severely limited – but never nonexistent. They include:
- Starting up a payment plan.
- Arguing for an offer in compromise.
- Getting relief from a lien (to seek refinancing)
- Filing is currently not collectible.
There are eligibility rules for each of these options. These can be rather strict, and the most basic requirement regardless of what option you pursue is that you are up to date on recent tax returns. In most cases, this requires you to have filed for at least the last three years, if not as far back as six years.
If you have never been in debt to the IRS before, then you may also consider a penalty abatement via Form 843. This does not reduce the original debt you owe but may reduce the total debt by stripping penalties and interest added on top of it.
Making a Payment Plan
Payment plans are for taxpayers with a debt they can pay off either within 180 days via up to six individual payments, or in monthly installments until the debt is paid/has reached its collection statute expiration date, or CSED (ten years from the date of tax assessment, plus tolling periods).
Taxpayers who agree to a payment plan with the IRS early enough can avoid tax liens and other collection efforts and are also granted a lowered interest rate. Applying for a payment plan is quite easy and can be done online if the taxpayer owes less than $50,000 (for long-term payment plans) or less than $100,000 (for short-term payment plans).
Aside from being up to date on all tax returns, other assorted requirements for a payment plan include basic personal information (such as name, date of birth, and filing status), a valid email address, and either your individual tax ID number (ITIN) or Social Security number.
Exploring an Offer in Compromise
When taxpayers have encountered significant financial hardship, they may no longer be able to reasonably pay back their tax liability. These taxpayers are given recourse through the IRS’s offer in compromise option. This is an offer the taxpayer themselves must draft and send, detailing what they are prepared to pay on a monthly basis for the next 12 months, 24 months, or the remainder of the time left in the debt’s collection statute period (depending on how the payments should be structured).
An offer in compromise is only accepted by the IRS when the taxpayer’s financial situation is such that they do not have the income nor the assets necessary to pay off their tax liability within the CSED. To determine this, the IRS requests specific financial information and pulls data from various third parties (such as banks and employers) to determine a reasonable collection potential. If the taxpayer’s offer matches this potential, the offer may be considered. If it is less than the IRS’s estimate, it is most likely rejected.
An offer in compromise is not a magic bullet, but it can help indigent taxpayers get the break they need to escape debt and start working their way back towards a better standing in life.
When to Hire a Professional
Minor tax debts can often be settled directly through the IRS, with little instruction or hassle. But larger debts, or overwhelming debts (especially after financial hardship) may require an experienced professional’s help, to navigate the IRS’s options, and identify the best path forward.
Don’t Avoid the Issue
Regardless of whether you can or can’t afford to pay, the last thing you should do is ignore the issue. The IRS can pile penalties and interest on your existing tax liability like no other creditor and pursue increasingly aggressive measures to collect if you continue to avoid them.
Deal with the IRS as soon as possible, preferably by contacting them directly or working through a professional (depending on the size and circumstances of your debt) and address your debt head-on.
Whether you’re looking to get started on a payment plan, want to formulate a budget and seek financing to tackle your liability, need help getting a lien released to start paying back, or feel like you’re in a position to inquire about an offer in compromise, don’t hesitate to get in touch today, and get started.