Tax Debt / IRS Debt

If you find you owe the government taxes, don’t panic. You’re not alone.

An estimated 17 percent of federal taxes go unpaid each year. People who owe tax money to the Internal Revenue Service (IRS) may have claimed too many exemptions on their employee withholding forms, failed to file a tax return, under-reported income or made any number of other errors. Or they simply have decided not to pay up.

If these debts to the IRS are not resolved in a timely manner, unpaid taxes can have serious consequences ranging from property seizure to jail time.

If you owe taxes for any reason, including an inability to pay the bill, the IRS has programs that can help you settle your debt.

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IRS Repayment Options

Depending on your financial situation, you may be eligible for a tax repayment plan through the IRS. Your main options include an installment agreement, an offer in compromise (OIC) and a temporary delay of payment.

Installment Agreement

An installment agreement, also known as a payment plan, is a means of paying off your taxes over time. The total debt is finalized and you make predetermined monthly payments.

Some taxpayers can complete an installment agreement within four months and avoid additional fees. But if your plan lasts more than 120 days, there could be a fee of up to $105 for setting up a long-term agreement.

Offer in Compromise

Much like debt settlement, an offer in compromise allows you to negotiate with the IRS. This agreement allows you to have some of your tax debt forgiven. If your offer in compromise is accepted, you only have to pay part of what you owe.

There are two payment options with an offer in compromise. The first is a short-term offer, which gives you five months to pay off your debt. The other is a Partial Payment Installment Agreement (PPIA), which takes longer.

Temporary Delay

If you can’t pay any portion of your debt because of a short-term financial hardship, the IRS may deem your debt as not collectible. In this case, the IRS can grant you a payment deadline extension.

An extension will give you more time to collect funds, but it may lead to penalty charges on top of your current debt amount.

Bankruptcy and Tax Debt

Understand that filing for bankruptcy should be your last option. The short- and medium-term implications of bankruptcy are severe, and they can hinder even the simplest of financial transactions (renting an apartment or buying a car). So weigh all your options before considering bankruptcy.

If you do decide to declare bankruptcy, your two primary options are to file under Chapter 7 or Chapter 13. Chapter 7 bankruptcy discharges most of your debts. Under Chapter 13, however, you’ll be responsible for completing a three- to five-year payment plan to partially repay your debts.

Be prepared to carry most of your tax debts with you even after your bankruptcy is finalized. No matter which type of bankruptcy you file, some tax debts cannot be cleared. These debts will be unchanged if you file under Chapter 7. Under Chapter 13, you’ll be given the span of your repayment plan to repay these “priority” tax debts.

Tax debts that cannot be cleared by bankruptcy
  • Tax liens, or tax debts secured by your property.
  • Property taxes payable within one year of your bankruptcy filing. Older property tax debts may be dischargeable.
  • Taxes collected or withheld by a third party, such as Medicare, withheld income taxes and sales taxes.
  • Certain employment taxes.
  • Tax penalties accrued within three years prior to your bankruptcy filing.
  • Incorrect tax refunds.

 Fully Dischargeable Tax Debt

There are certain debts you can fully discharge in Chapter 7 or partially discharge in Chapter 13. The only tax debt typically in this category, called non-priority debt in Chapter 13, is certain income tax debt.

To be completely or partially erased, income tax debt must meet ALL of the following requirements:
  • The corresponding tax return was due at least three years prior to your bankruptcy filing.
  • You filed the tax return at least two years prior to your bankruptcy filing.
  • The taxes were officially assessed by the IRS at least 240 days prior to your bankruptcy filing.
  • You did not commit fraud or intentionally evade tax laws on your tax return.

Nonpayment Consequences

It is rarely a good idea to decide not to pay your IRS tax bill. The consequences of this can be severe, including prison.

If you don’t pay the IRS what you owe and don’t attempt to work out a payment plan, the government can use your tax refund to offset what you owe.

After this, the government will begin a collection process. The IRS can file a tax lien against you, use a levy and serve a summons.

A tax lien will come before any other action. Because tax debt is secured debt, the government has a legal claim to your property. This means the IRS has the right to seize your property to cover owed taxes.

A tax lien is automatically filed 10 days after the IRS sends you a notice of taxes owed. It appears on your credit report and can affect your score for seven years after the debt is paid off.

A levy comes after a tax lien. A levy is the actual seizure of your property and is used to pay off your debts. It may include seizing and selling your physical property, such as a car or house, or it may include taking money from a source such as your paycheck or bank account.

A levy can occur only after 30 days have passed since you were issued a tax lien.

At any point, the IRS may also issue a summons. In the case of tax debt, this is used to force you to produce documents. This can be used to investigate your financial standing.

Ignoring a summons can have severe consequences, including fines and imprisonment.

If you haven’t paid a tax debt, the best way to avoid lasting consequences is to clear the debt as soon as possible. Pay it if you can. Otherwise, apply for a payment plan or ask for an extension. In many cases, the IRS will work with you to get the debt paid.

Bill Fay

Author

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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