Meet Sarah, a freelance graphic designer whose business hit some bumpy roads last year. As she grappled with client droughts and unexpected expenses, her tax obligations took a backseat. Soon, IRS notices started trickling in, with an accumulating debt that seemed impossible to conquer. Like many Americans, Sarah felt overwhelmed—until she discovered how to resolve her IRS tax debt that gave her a light at the end of the tunnel.
Across the country, IRS tax debt lingers like a shadow over millions of taxpayers. In 2021 alone, tax, penalty, and interest debts tallied over $133 million. But there’s a silver lining: the IRS has various programs designed to help taxpayers like Sarah find a path to solvency. This guide will teach you time-tested strategies to manage and dissolve your IRS tax debt—and reclaim your financial footing.
1. Pull the Emergency Brake on Collections: Request a Temporary Deferral
If you’re currently not able to pay your tax debt, you can apply for a temporary delay of the collection process, it’s like firing off a signal flare to the IRS which grants you temporary protection against collections.
If you are approved for this request, they will label your account as “Currently Not Collectible” (CNC). Keep in mind that while this stops the collection efforts, the interest and the standard 5% failure-to-file and 0.5% failure-to-pay penalties will continue to build on your balance.
2. Break It Down: Set Up A Payment Plan in Installments
You can manage your tax debt by setting up a payment plan with the IRS to pay in installments. There are two types:
- Short-term plans are for debts you can pay within 120 days and don’t require a setup fee.
- Long-term plans are for larger debts that need more time. There’s a setup fee, which varies based on how you apply (online, phone, mail, or in-person) and whether you’re low-income, which could qualify you for a reduced fee.
Use the IRS Online Payment Agreement Tool to apply for a plan that suits your financial situation.
Unsure of whether to opt for short-term or long-term payment plans? Drop your tenure-based dilemma in the comments below, and let’s analyze which payment route best suits your journey.
Pro Tip: Look into setup fee waivers if you’re a low-income taxpayer.
3. Get A Pardon: Get a First-Time Penalty Abatement
Have you been consistently paying your tax debts in the past?
If you have a clean compliance history, you might qualify for a first-time penalty abatement, it’s like a helping hand from the IRS to get you back on track. This relief can remove certain penalties like the failure-to-file, failure-to-pay, or inaccuracy-related penalties, although interest charges continue.
Eligibility Checklist:
- Have filed all required returns or filed an extension of time to file.
- Have paid, or arranged to pay, any tax due (except for the current year).
- Have no penalties for the three tax years prior to the tax year for which you received a penalty.
Contact the IRS or use Form 843 to request an abatement, citing your good history. After you get the abatement, you should aim to settle your debt as quickly as possible, as the IRS sets a new due date from the moment of your request, and the penalties begin to accumulate again.
4. Settle for Less: The Offer in Compromise (OIC) Option
Negotiating with the IRS may seem like a daunting chess game, but an Offer in Compromise (OIC) could be your strategic move to settle the debt for less than you owe.
An Offer in Compromise (OIC) allows taxpayers to settle their tax obligations for less than the full amount you owe. It’s a rigorous process, but with some careful documentation and a building a compelling case, it’s within your grasp.
Once you submit it, the IRS will either accept your offer or counter with a higher amount. Given that there’s no opportunity for further negotiation after the counteroffer, we recommend that you consult with a tax professional that’s experienced in OIC submissions to help you navigate this complex process and present your strongest case to the IRS.
5. Commence With Your Mastermind: Professional Consultation
Dealing with the IRS back and forth can seem like deciphering an enigma. A tax professional shines light on those cryptic passages.
At times, dealing with tax debt can feel like you’re stuck in a maze with no exit. This is when you should get a seasoned tax advisor to become your guide. Many offer free consultations, and they can help you come up with the right plan that’s tailored to your unique situation. Their expertise will help you demystify the IRS and their procedures and they can also help you find more savings than what they’ll charge you for their fees. So it pays for itself and then some.
Final Thoughts
Eliminating the burden of IRS tax debt is possible as long as you take the right approach.
Whether you want to go through the IRS’s relief programs by yourself or have a pro handle it for you, it’s crucial that you’re proactive in resolving your tax debt. Partnering with a tax expert isn’t only going to give you the advice you need to deal with your tax debt but it will also make sure that you have a strong representative in your dealings with the IRS.
Take the first step to getting your financial freedom by choosing a strategy that best matches your situation. Remember, getting help from a professional can make a huge difference in managing your tax debt efficiently and help you secure a more stable financial situation.
If you need help tackling your IRS tax debt, reach out to us for professional assistance. And share your thoughts, experiences, or any questions, and let’s work together to find you a solution that fits your needs.