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How To Get Out Of Debt With The IRS
You can avoid many things in life, especially when it comes to money, but few people avoid taxes and, by extension, tax debts. Sooner or later, you’re going to end up with an IRS tax debt, especially if you are a business owner. Owing a large sum of money to the IRS can be extremely, well, taxing. And the worst course of action you can take is to avoid it by refusing to settle it.
However, even if you are deeply in debt to the IRS, there are always options to help you get out of it. To avoid being one of the millions of Americans facing multiple tax penalties this year, the IRS-acceptable options and strategies are thoroughly discussed in this article. Here is what you need to know right now about getting out of debt with the IRS.
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Understanding the IRS’s tax debts
Without proper tax debt information, you will most likely fail to pay off what you owe the IRS on time, which means you will be included among the federal tax debt defaulters, and the penalties will continue to pile up to the actual owed sum.
Defaulters are penalized by the IRS by levying 0.5 percent of the amount owed. This sum is accumulated each month, and the percentage is recorded as new debt until it is cleared off or until the penalties total 25% of the total tax owed. Additional penalties apply if you do not file your tax returns on time. Aside from fines, the interest on owed tax is 3% per month, compounded.
With all of these penalties in mind, you need to make sure you pay your taxes on time and, if you are unfortunate enough to owe some sort of debt to the IRS, getting it cleared as soon as possible is absolutely critical.
The next sections will teach you how to fight IRS debt.
How to Get Rid of IRS Debt
If you owe the IRS and do not have the funds to pay it in full right now with your savings, you should definitely consider all of your options. For example, this may be one of those rare instances where it makes sense to pay off your debt with a credit card (or two credit cards), since it is likely way less expensive to take on credit card debt than it is to default on your debt payment. However, if you are not sold on pulling out a credit card to deal with your tax debt, here are some other options you should definitely consider if you want to know how to lower IRS debt.
1. File your taxes even if you can’t pay
One of the first steps toward debt repayment should be to file your taxes, since failing to do so will only exacerbate the situation. Once you do file your tax return, you should try to pay as much as possible to beat the deadline. Alternatively, it is also a good idea at times to try to get an extension on filing your taxes if you are attempting to arrange ways to pay expected tax debts as well. Chances are the IRS will grant you the extension, so check with your accountant or tax preparation specialists to see if this is a viable option.
2. Seek expert assistance
When it comes to taxes, you should never go it alone. Let’s face it: our understanding of taxation laws and techniques is minimal compared to the many reliable accountants and tax preparation specialists out there, all of whom make a living helping people and businesses with their taxes. So, if you find yourself suddenly facing tax debt, find a reputable accountant or tax specialist you can trust to help you navigate your way to an equitable resolution with the IRS.
3. Request a reasonable compromise offer
Making an offer of compromise with the IRS is one promising way to settle a tax debt. You will be considered for a reduction in the amount you pay as debt settlement due to this. However, you must demonstrate to the IRS that you are unable to repay your debt. To do so, you will be required to fill out a form that will cost you $186, and in the form, you will be required to write down detailed information about your spending habits, earnings, securities, and investments. A specialist at the IRS will examine your net worth, credit sources, and other relevant information to determine whether you are eligible for a discount and, if so, how much you can afford to repay each month.
4. Demand for a non-collectible status
If you can reach an agreement with the IRS for a currently non-collectible status, you can put your tax payment on hold. This causes levies and liens on your tax case to be frozen, but it is usually only temporary, lasting about a year. And if your financial situation improves, you’ll be given an even shorter break.
5. Set up payment plans
Having an installment plan initiated is one of the best strategies for reducing your tax debt. Installment plans are similar to home mortgages in that you make monthly payments to pay them off. In the case of tax debts, you make periodic payments to the IRS rather than to lenders.
Installment plans with the IRS are through an agreement, with the IRS reserving the right to either play into or object to such a deal with them. To get into an installment plan with them, you need to have the following requirements satisfied.
- You must be up to date in filing tax returns.
- You must prove that your state income taxes, and late fees are appropriately paid.
- You must also show proof that the minimum monthly installments which the IRS would require you to pay can be met by you.
Some of the installment plans that the IRS offers include:
- Guaranteed Installment Agreements. You can obtain this agreement with the IRS if you can demonstrate your ability to repay your debt of less than $10,000 within three years. These agreements are legally binding and should be easily accessible to anyone.
- Streamlined Installment Agreements. For those who owe the IRS $50,000 or less but not less than $10,000, this agreement ensures that settlements are made within the next 72 months or the remainder of the collection statute, whichever comes first.
- Non- Streamlined Installment Agreements. This program is for people who owe more than $50,000 in tax debt but less than $250,000 in total. It is ideal for those who can afford to spread the payment over the remainder of the collection statute period. Under this plan, you will not only avoid having to report your assets, income, and budget to the IRS, but you will also avoid being subjected to a plan that is limited to a specific period, as your collection statute period will be considered.
6. Accessing innocent spouse programs
The IRS has programs that a spouse can access to reduce tax debt. It is important to note, however, that these programs are usually somewhat controversial. As a result, the IRS provides publications that explain the programs, which should always be read before applying. For example, even if you are legally separated, you may be held liable for a tax debt if you and your partner filed a joint tax return.
Fortunately, the IRS has a relief program for any spouse or former spouse who can demonstrate that the other partner or former lover failed to report income or took improper deductions. To qualify for this tax relief as the innocent spouse, you must demonstrate that the other partner refused to pay the debt owed. Aside from proving to the IRS that the guilty spouse deceived you, you must seek exemption on time. And that usually takes about two years from the time the IRS first requests payment on the tax debt.
7. Separation of liability relief
This relief is for divorced or legally separated partners who have not shared a household for at least 12 months. On the other hand, the innocent partner must demonstrate to the IRS that he or she was unaware of the incorrect information contained in return submitted to the tax agency. Divorced or legally separated partners who file a joint tax return frequently use this option.
8. Equitable tax relief
The equitable tax relief program is another option that spouses can use to get out of tax debt. This program is available to those who do not qualify for the previous two relief programs but can demonstrate to the IRS that an error was made on a joint tax return. Aside from when something was not properly reported, equitable relief may be accessible when the tax reported on the joint return was true but was not paid with the repayment.
9. Statute of Limitations
This is one of the more difficult methods of resolving your IRS tax debt. As such, it should be used only as a last resort after all other options have been exhausted.
Given that the IRS has 10 years from the assessment date to collect tax, interest, and penalties, debtors use this to dissolve their IRS debt. The tax collector is barred from collecting debts from the taxpayer for ten years after the filing date under this statute of limitations. Even when the collectors attempt to collect the tax debts, the debtor’s court appeals impede such efforts, eventually delaying collection. This allows you to avoid a lien or seizure before the statute of limitations expires.
Trying to wait out the statute of limitations, on the other hand, is a double-edged sword that can come back to bite you. If your intention fails, you will be obligated to pay off the accumulated interest and penalties over the years. And that will almost certainly be a large sum from you to the authorities.
10. Utilizing a personal loan or a credit card
As stated at the very beginning, one way to pay off a tax debt is to take out a personal loan. If you have a good credit score, you may be eligible for a large sum of money to pay off your debts. On the other hand, loans can keep you in debt if you don’t qualify for one with low-interest rates.
Aside from personal loans, you can also use credit cards to help you pay off your tax debt. It is worth noting that credit cards are typically more expensive than personal loans, so look for credit cards with low APRs. Credit cards on deep discounts are usually a good way to pay off your tax debt quickly. However, be cautious because when the promotional period expires, you may face significant interest charges. Overall, you should attempt to use many of the other methods detailed here before you start to rely on loans and credit cards.
11. Using Home Equity
Accessing your home equity can be another way to address your IRS tax debt, but, like credit cards and loans, it should only be used as a last resort. Because tax debts are unsecured debt, using your home equity to pay it off can indirectly turn your house into collateral. If you cannot make regular mortgage payments or if the IRS places a lien on your property, it is best to avoid putting up your home as equity.
Tax debts are common, and their repayment should not be avoided or left unresolved by any individual, regardless of the amount. The article discussed the various options available for settling a tax debt owed to the IRS. There is, however, a general rule of thumb recommended for debtors, but it is not a must-follow guide. If your debt is less than $10,000, it is usually best to negotiate a payment plan with the IRS yourself.
Furthermore, if the tax debt owed is between that amount and $25,000, chances are you won’t be able to handle it yourself even if you are given the necessary knowledge of what to do, so it is advised that you seek the advice of a lawyer. And for tax debts of $10,000 or more, it is recommended that a professional be contacted to settle the debt.
Finally, when in doubt about how to deal with tax debt, make sure you find a trusted financial expert to help assess your options, and plot the best way to move forward and deal with that debt.