If you’re dealing with an IRS tax debt situation, you are certainly not alone. A recent report revealed that some 11.23 million Americans owe a total of more than $125 billion in back taxes to the IRS.
Every individual has unique reasons for falling into arrears with the IRS. For some, it’s underreported income from investments or side jobs. For others, it’s simple human error. And then there are those whose situation is so complex there is no easy explanation.
The point is that all IRS tax debt is resolvable to some degree. What makes the difference for the taxpayers we work with at Traxion Tax is knowledge of the tax code and an understanding of what actions need to be taken to make progress in remediating the debt, even if that progress is slow and steady.
In this guide, we have collected the most effective options and strategies we’ve seen work for the thousands of taxpayers we have helped over the years.
If you owe money to the IRS, this guide is for you.
[Note: This guide is meant to provide a general overview of debt resolution options and strategies. For a case-specific evaluation of your individual tax debt, along with a detailed action plan, we highly suggest scheduling a free, no-risk consultation with a member of our team today.]
What is IRS Tax Debt?
IRS tax debt arises when taxpayers fail to pay the full amount of taxes owed to the Internal Revenue Service by the due date. This can occur due to underpayment, missed deadlines, or inaccuracies in tax filings.
Tax debt includes the original amount owed plus any penalties and interest accrued over time.
Consequences of Unresolved Tax Debt
If IRS tax debt goes unpaid, there are several possible outcomes, including:
- Penalties and Interest Accumulation: Unpaid taxes incur significant penalties and interest, increasing the total amount owed over time.
- IRS Enforcement Actions: The IRS may take aggressive steps to collect the debt, such as filing liens against property, levying bank accounts, or garnishing your wages.
- Impact on Financial Stability: Tax debt can severely affect your credit score and overall financial health, making it harder to secure loans or other financial opportunities.
These consequences can have long-lasting implications that can follow you throughout your life until the debt is confronted and resolved. Ignoring the problem will only make it worse, and taking action is the single best thing you can do.
Now, let’s take a look at the most common IRS tax debt resolution options available to you.
IRS Tax Debt Resolution Options
Depending on the amount of tax you owe and your ability to repay it either all-at-once or over time, there are numerous options available to you.
Payment Plans
The IRS offers payment plans to help pay off your debt in manageable installments over time.
There are two main types:
- Short-Term Payment Plans: Typically for debts that can be paid within 180 days. No setup fee is required, but interest and penalties continue to accrue.
- Long-Term Installment Agreements: For larger debts requiring more time to repay. These may involve setup fees and require you to make regular monthly payments.
You may qualify if you owe less than $50,000 in combined tax, penalties, and interest. Applications can be submitted online, by phone, or via mail.
Offer in Compromise (OIC)
An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if you can demonstrate that paying the full debt would cause financial hardship.
To qualify for an OIC, the IRS will consider your income, expenses, asset equity, and your ability to pay.
To apply, you must submit IRS Form 656 and pay an application fee. Supporting documentation is essential – without it, your OIC will almost certainly be rejected.
If you do go the OIC route, be sure to provide detailed and accurate information to prove financial hardship and ensure tax returns are filed up to date.
Currently Not Collectible (CNC) Status
If you cannot afford to pay your debt, you can request Currently Not Collectible status to be assigned to you, which effectively halts IRS collection efforts temporarily while you work on improving your financial situation.
To qualify for CNC status, you must prove that your income is insufficient to cover basic living expenses.
Remember that penalties and interest continue to accrue during this period, and the IRS may review the taxpayer’s financial situation periodically.
Penalty Abatement
If accrued penalties are a component of the overall amount of IRS tax debt you owe, the IRS may grant you penalty relief in certain circumstances:
- If you have a clean tax compliance history over the past three years, you may qualify for a First-Time Penalty Abatement.
- If you can demonstrate circumstances like natural disasters, illness, ore reliance on incorrect professional advice, you may be granted a Reasonable Cause penalty abatement.
To submit a request for either of these abatements, you’ll need to file IRS Form 843 or contact the IRS directly with supporting evidence.
Bankruptcy and Tax Debt
In some cases, tax debt can be discharged through bankruptcy. However, this is only possible when the debt meets specific criteria, such as being at least three years old and properly assessed.
Recent tax debts and penalties for fraud are not dischargeable.
Filing for bankruptcy has significant near- and mid-term consequences, and making the decision to file for bankruptcy should not be taken lightly. Seek professional advice to evaluate this option, starting with a consultation with Traxion Tax to fully evaluate your IRS tax debt case (for free).
Now that we’ve identified the most common options for resolving tax debt, let’s take a look at some strategies that pair well with these options, with the goal of resolving your tax debt as quickly and effectively as possible.
Strategies for Resolving IRS Tax Debt
While the options listed above are great tools for resolving IRS tax debt, they’re best used alongside strategies that are purposely developed for your individual case.
Assessing Your Financial Situation
The first step in resolving tax debt is to evaluate your financial situation thoroughly. This involves:
- Calculating Your Debt: Obtain a complete breakdown of the amount owed, including principal, penalties, and interest.
- Budgeting: Analyze your income and expenses to determine how much you can allocate toward resolving the debt.
- Gathering Documentation: Collect all relevant financial records, such as tax returns, income statements, and proof of expenses.
With this step complete, it’s time to confront the IRS directly.
[Remember: you don’t have to do this on your own. An Enrolled Agent at Traxion Tax can be employed to act on your behalf, giving you confidence that you are being expertly represented.]
Contact us to learn more about how Enrolled Agents help taxpayers like you.
Communicating with the IRS
Open and proactive communication with the IRS can prevent enforcement actions and facilitate resolution:
- Contact the IRS Early: As soon as you recognize an issue, reach out to discuss your options.
- Be Honest and Transparent: Provide accurate information about your financial situation.
- Keep Records of All Communication: Document phone calls, letters, and agreements for future reference.
As scary as this step may seem, it is absolutely essential to resolving your tax debt. While the IRS is not known for its kindness, humanity, or excellence in customer service, it does operate similarly to a machine with an ‘Input/Output’ function.
When you start adding ‘inputs’, you will get ‘outputs’. Treat the IRS like a machine and less like a business, and your chances of eventually success will be higher.
Seeking Professional Help
Navigating tax debt alone can be overwhelming. Tax professionals can offer invaluable support; the challenge lies in selecting the right one for you.
When evaluating tax debt resolution firms, look for client reviews and a steady track record. Look for case studies and expertise in published articles. At Traxion Tax, we’re proud of our history of success with taxpayers like you, and we’re always happy to share stories of how we’ve helped individuals with tax situations similar to yours.
At the end of the day, who you choose to work with to resolve your tax debt is a personal choice. Just be sure you conduct your due diligence to avoid the less reputable options out there.
Avoiding Future Tax Debt
Resolving current tax debt is only part of the solution. As tempting as it may be to revert back to previous patterns after the tax debt is resolved, it’s important to implement a plan for staying out of hot water with the IRS for good.
Preventing future IRS tax debt issues requires proactive steps:
- Stay Compliant: File your tax returns on time and pay taxes due by the deadline.
- Set Up Withholding Correctly: Ensure your employer withholds the appropriate amount of taxes from your paycheck.
- Create a Tax Payment Plan: Save for tax payments throughout the year if you are self-employed or have variable income.
- Use IRS Resources: Take advantage of tools like the IRS Withholding Estimator to avoid underpayment.
Also, keep in mind that Traxion Tax offers a tax profile monitoring service that continuously updates you with changes to the information that the IRS has about you. This service can be invaluable for individuals with numerous forms of income, complicated investment vehicles, or other, more involved ongoing tax liability situations.
To learn more about this service, contact us today.
A Final Note on Staying Positive
No one likes dealing with a delinquent IRS tax debt situation. It can feel embarrassing, frustrating, and defeating, especially considering how cold and rigid the IRS can feel at times.
Throughout your tax debt resolution journey, it’s crucial to maintain a positive mindset as you work through the steps you need to take to get yourself out of this situation. It’s not always easy, and there may be times when you’ll question whether or not you’re making the right decisions, but with the right professional guidance, access to information like this guide, and steady diligence, you’ll be on the other side of your tax problem before you know it.
In the wake of a difficult tax debt problem, peace of mind is possible. Stay the course, and always remember that Traxion Tax is here to help you at any point. Good luck!