Of all the debts you can possibly owe, federal tax debt is the most unavoidable. After all, the government can almost always find a way to collect.
Overdue tax bills involve harsh penalties and interest charges, and the IRS can place liens on property, seize funds from your bank account or even garnish your paycheck.
Despite how it may feel, it’s not the IRS’s intention to punish you or to go after you for money you don’t have. In fact, the agency has several payment options for people who can’t pay.
What Is Tax-Debt Relief?
Tax-debt relief refers to your options for resolving a debt you owe to the government.
The relief options available through the IRS typically involve a payment plan or negotiating a debt settlement—also known as an offer-in-compromise. The best option for a tax debtor depends on their specific financial situation.
In addition to the IRS’s payment options, there are for-profit companies that advertise solutions for paying tax debts but beware. Despite their promises, tax settlement services are often expensive, inefficient, and high-risk. Alternatively, there are professionals who can help you explore your options for repayment.
Who Might Need Tax-Debt Relief?
If you’re experiencing any of the items on this list, you’ll want to explore your options for tax-debt relief as soon as possible:
- You have overdue taxes and don’t have a way to cover the bill.
- The IRS has sent you letters regarding your debt.
- The IRS has hired a private debt collector to collect your debt.
- You’ve failed to file your tax return for one or more years.
- Your debt is “seriously delinquent” ($52,000 or more) and the IRS has instructed the State Department to deny, revoke or confiscate your passport.
Done right, a tax settlement company will:
Tax settlement companies claim they can help with IRS debt. Unfortunately, it’s nearly impossible to find a trustworthy firm.
“No one can get a better deal for taxpayers than they can usually get for themselves by working directly with the IRS to resolve their tax issues,” IRS Commissioner Chuck Rettig said.
On the other hand, there are qualified professionals who can help you explore your options, including one of the IRS’s own Taxpayer Advocates, or a tax attorney or a certified credit counselor. Here are the signs that a professional is trustworthy:
- Has up-to-date professional certifications, licenses, or works for an accredited company
- Takes time to learn why you fell behind or failed to file
- Helps you understand the IRS’s payment options
- Provides a realistic assessment of what you’ll have to pay
- Does not charge an up-front fee or pressure you to use their services
IRS Relief Options
If your federal taxes are overdue, or if you can’t pay an upcoming bill, the IRS offers a handful of options. Each solution is outlined in detail at IRS.Gov, but here’s an overview of what’s available:
Installment agreements with the IRS are similar to loans: You pay a set amount of money each month for a period of time (up to six years) until your tax bill, including interest and penalties, is paid off.
Like any loan, IRS installment agreements come with interest charges and fees, but they also have a number of benefits for tax debtors:
- End the accrual of penalty fees
- Stave off liens, levies, garnishments, and other collections activities
- Make your debt payment more affordable by spreading the cost out over multiple months
Offer in Compromise (OIC)
With an offer in compromise (OIC) you agree to settle your tax debt for less than the full amount owed, and you pay the IRS via lump sum or monthly installments.
Taxpayers who can prove that paying their full debt—whether now or over time—isn’t feasible, may qualify for an OIC.
The IRS will weigh a host of factors before accepting your offer, including your income, expenses, and asset equity. Despite what you may have heard in radio ads for tax settlement, however, the IRS rarely accepts these offers. Plus, you’ll have to pay a nonrefundable application fee to the IRS and pay 20% of your total offer amount upon application.
For debtors, you’re most likely to be successful if the IRS believes you’ve offered the largest amount that the agency can expect to collect from you within a set period of time.
Currently Not Collectible (CNC)
In some circumstances, delinquent taxpayers who genuinely can’t afford to pay any money toward their debt, can get the bill deferred.
If the IRS deems your tax debt is “Currently Not Collectible,” the agency will cease collection efforts temporarily, which can give you some breathing room. However, there are downsides:
- The debt accumulates interest and late penalties during deferment.
- The IRS may file a lien against your property.
- The IRS will apply your future tax refunds to your past-due tax bill.
Innocent Spouse Relief
The IRS sympathizes with spouses or former spouses who, through no fault of their own, are on the hook for taxes.
Couples who file joint returns are both liable for the taxes they owe, but the IRS can relieve one partner of taxes, interest, or penalties if the other partner was at fault for underreporting the taxes owed.
To be eligible for Innocent Spouse Relief, you must meet the following criteria:
- You filed a joint return with your spouse
- Your taxes were understated due to unreported income or other errors on your return
- You didn’t know about the errors
- You live in a community property state
- You request relief within two years of receiving an IRS notice of an audit, or taxes due, because of the error
IRS Forgiveness Program
The IRS’s Fresh Start Initiative, which was rolled out in 2011 and has since been expanded, can help troubled taxpayers get into compliance.
With Fresh Start, it’s easier than ever to qualify for installment programs or offer-in-compromise settlements.
Among the highlights:
- For offers that will be paid off in five months or less, the agency looks at only one year of future income (down from four) when assessing how much they can collect.
- For six to 24 months of payoffs, the IRS now looks at only two years of future earnings (down from five).
- The IRS now considers your credit card payments, bank fees and certain other allowances when determining what you can afford to pay.
Penalty & Interest Abatement
It doesn’t happen often, but if you can demonstrate a special hardship the IRS may offer penalty abatement for your delinquent bill. In other words, the agency may remove certain penalties and stop adding new charges.
Under its First Time Penalty Abatement policy, the IRS may grant you relief for things like failing to file a tax return, pay on time, and/or deposit taxes.
The agency’s requirements include:
- You filed the same return type, if required, for the past three tax years prior to the tax year in which you received a penalty.
- You’ve filed all currently required returns or filed an “extension of time to file.”
- You have paid, or arranged to pay, any tax due.
Interest abatement is more limited than penalty abatement and is rarely approved. The failure-to-pay penalty also continues to accrue until your taxes are paid in full. For that reason, you may want to wait until you fully pay the overdue bill before requesting relief under the First Time Penalty Abatement policy.
Signs of a Tax-Debt Relief Scam
As with any industry — especially one that deals with people who are desperate and panicked — there are legitimate companies and there are predators.
The first way you can avoid a scam is by ignoring the advertising hype: For most tax debtors, having the majority of your debt forgiven is a false promise.
Next, do your homework. Go beyond the advertising and find neutral-observer rankings of legitimate tax relief companies.
Finally, arm yourself with knowledge about when you’re dealing with a bad actor.
Common signs that a tax debt relief company is attempting to swindle you:
- Marketing to you directly via letters or email
- Guaranteeing results without gathering information about your debt
- Claiming they can eliminate or radically reduce penalties and interest
- Demanding payment up-front
- Failure to ask why you’re behind with the IRS or to discuss your current financial situation
- Delaying results by asking for the same documents repeatedly or by other means
- Telling you (after charging money) that your debt relief window has closed, or the IRS rejected your application
Alternatives to IRS Tax Debt Relief
As you’ve probably gathered by now, there’s no guarantee you’ll find an affordable solution with the IRS. Fortunately, you might have other avenues to come up with money to pay your overdue tax bill.
Loans and credit cards can be an option for covering IRS tax debt, but each of the options below has major drawbacks, so consider them carefully:
- Home Equity Line of Credit (HELOC): If your credit is good enough to qualify, and you have equity in your home, you could apply for a HELOC, which is a line of credit you can draw from and pay down an unlimited number of times. Your home will be collateral for HELOC debt and you’ll be charged interest on any balance you owe, plus a number of fees
- 401(k) loan: A 401(k) loan allows you to make an early draw from your retirement savings, but it has to be paid back. You’ll be charged fees and interest on the loan, and you’ll have to pay taxes on the amount you withdraw. Plus, you lose out on some of the interest your savings would gain before retiring.
- Credit cards: Credit cards can be one of the most expensive methods of paying for anything, including paying off debt. The average credit card interest rate is over 19% APR, so it can be far more expensive to pay off a credit card than to pay a debt owed to the IRS.
State & Local Taxes
Falling behind on state or local taxes is a completely different ballgame. While states and local tax authorities offer debt settlement programs, they can be very different from the IRS. Some states may waive interest but not penalties; for example, while other states offer the reverse.
For more information about paying your state tax bill, contact your state comptroller’s office. You can also visit NASACT.Org for a state-by-state listing of auditors, comptrollers, and treasurers.
Other Debt-Relief Help
There are other ways to take care of your tax bill that don’t involve taking on more debt. In fact, the following options could not only help you resolve your IRS debt but address other financial troubles:
- Credit counseling: A certified, nonprofit credit counselor can review your full financial situation to make suggestions and offer the best strategies for recovering from debt. Their services are free or low-cost.
- Legal help: A lawyer can help you explore ways for dismissing debts that are unpayable, and in some cases, bankruptcy may be an option for clearing tax debt.
- IRS Taxpayer advocate: An IRS’s taxpayer advocate can help you explore your payment options, recommend solutions, and connect you to taxpayer resources.
Get Professional Help with Your Debt
Lots of companies offer to “help” with tax debt, but few can actually deliver. Before discussing your tax information with a third party, make sure you seek out a reputable nonprofit credit counseling agency or a qualified professional.
When it comes to getting financial advice, credit counselors are amongst the few professionals who can answer questions and offer objective advice (without ulterior motives). You can schedule an appointment to speak to a counselor about tax debt and any other financial challenges you’re facing, including budgeting, credit reviews and managing other debt.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- N.A. (ND) The IRS Fresh Start program can help you pay your taxes. Retrieved from https://www.irs.gov/pub/irs-utl/oc_theirsfreshstartprogramcanhelpyoupayyourtaxesfinal.pdf
- N.A. (2019, February) Individuals who need passports for imminent travel should contact IRS promptly to resolve tax debt. Retrieved from https://www.irs.gov/newsroom/individuals-who-need-passports-for-imminent-travel-should-contact-irs-promptly-to-resolve-tax-debt
- N.A. (2022, June 7) Dirty Dozen: IRS urges anyone having trouble paying their taxes to avoid anyone claiming they can settle tax debt for pennies on the dollar, known as OIC mills. Retrieved from https://www.irs.gov/newsroom/dirty-dozen-irs-urges-anyone-having-trouble-paying-their-taxes-to-avoid-anyone-claiming-they-can-settle-tax-debt-for-pennies-on-the-dollar-known-as-oic-mills