Death and taxes are life’s two great certainties but every year a sizeable number of people who owe the Internal Revenue Service act as if they don’t grasp the maxim.
Falling behind on income tax payments is almost always a very bad idea. Not only will you owe the government money, the government eventually will catch on and hit you with a bill for what you didn’t pay with interest. And, oh, the longer you delay, the worse the consequences.
Fortunately, the IRS will sometimes work a deal with those who can demonstrate that they couldn’t pay taxes because they didn’t have the money, not because they were hellbent on cheating the government. For those who want to settle their tax debt but are so strapped that they can’t immediately pay what they owe, the IRS offers options. You need to understand the options and choose a strategy that works for you.
Installment plans are like home mortgages, but instead of paying a lender every month, you pay the IRS every month.
A tax-payment installment plan is an agreement with the IRS. In order to enter the installment plan, you need to satisfy IRS requirements, including:
- You are up to date in filing tax returns.
- Your state income taxes and late fees are mostly paid.
- You can make the monthly minimum payments that the IRS requires.
Qualifying for a tax installment plan isn’t always possible. The IRS, as a tax collection agency, always prefers receiving tax payments to not receiving them. But it also isn’t interested in entering a payment agreement with a truant taxpayer who is unable to make the monthly installments.
The IRS won’t deal with you if you are more than $50,000 in arrears. If you meet the debt criterium and have filed you past tax returns, the IRS will use a formula to arrive at a monthly payment. You should consult a certified tax resolution specialist, or an attorney specializing in tax debt to review your options and negotiate a payment plan with the IRS.
Offer in Compromise
The IRS will sometimes consider a settlement that allows you to pay a reduced amount of what you owe in back taxes, which is called an offer in compromise. You must convince the IRS that you can’t afford to pay what you owe and offer to pay the reduced amount in a lump sum or in short-term installments.
Though you might have seen television commercials suggesting that paying the IRS pennies on the dollar can be easily accomplished, such ads are misleading. The IRS has a special form that you need to complete when proposing a compromise, and it charges a $186 filing fee. The form requires detailed information about your income, spending habits, assets and any equity you might have in investments. If you are working for wages or for yourself, you’ll also need to submit a collection information statement that is used to evaluate your ability to pay.
In evaluating your application, the IRS will consider your net worth and your sources of credit such as credit cards and home equity lines of credit. It will then compare your income with your monthly expenses to determine what you can afford to pay each month.
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You can’t apply for a compromise if you have an open bankruptcy filing. If you are accepted into a compromise agreement, you will have two years to settle your tax debt.
Release Wage Garnishments
If you owe money and haven’t reached a payment agreement, the IRS can move to garnish your wages. It also can garnish federal payments (Social Security, tax refund, etc.) until your tax debt is paid or the statutory time limit for collecting has passed. If you’re hit with a garnishment and can’t afford to live on the money left over, contact the IRS to propose a modification. If the IRS agrees, the amount it garnishes might be reduced.
Innocent Spouse Programs
If you file a joint tax return with your spouse, even if you are legally separated, you can be held individually responsible for an underpayment. But the IRS offers some relief for married or separated couples if a spouse, or former spouse, hides a tax liability from the other.
If one partner can demonstrate that the other failed to report income, reported income improperly or took deductions or credits that weren’t permitted, the partner who was misled can seek relief from tax liability.
To qualify for innocent spouse relief, you must be able to show that your spouse misled you by either not reporting income or by taking deductions or credits that weren’t permitted. Generally, you have two years from the time the IRS first attempted to collect the unpaid taxes to file for relief.
The IRS allows two other provision for couples with a tax reporting problem:
- Separation of liability relief offers an exemption for divorced or legally separated partners who haven’t shared a household for 12 months prior to a relief application. Relief applies to those who signed a joint tax return that understated how much was owed when one partner was unaware of erroneous information contained in the return.
- Equitable tax relief is available to those who don’t qualify for innocent spouse relief or separation of liability relief if they can show that something not reported on a joint tax return was solely the responsibility of the other spouse. Equitable relief can also apply when the tax reported on the joint return was correct but wasn’t paid with the return.
Innocent Spouse programs are complicated. The IRS offers a publication explaining the programs and a form that can be completed to seek relief.
Statute of Limitations
The IRS has 10 years from the date of assessment, which is usually soon after the filing date, to collect taxes, interest and penalties. Tax lawyers and other advisors sometimes try to use the statute of limitation to resolve a tax case. Even if the IRS attempts to collect a tax debt, the taxpayer can file collection appeals to try to stall a tax levy, lien or seizure prior to the statute of limitations deadline.
Trying to wait out the statute of limitations is a risky strategy. If you fail, your unpaid interest and penalties will have increased and you will be liable for an even larger payment to the government.
Currently Not Collectible
If you can offer reasons why you simply aren’t able pay your tax now, the IRS can put your case on hold, labeling it currently not collectable. The “not collectable” status is temporary, and the IRS will tell you when you’re expected to pay. The advantage is the distinction puts a hold on tax levies, wage garnishments and liens on your property.
Work with a Tax Professional
Hiring a tax professional or attorney to help you with your compromise application is worth investigating. If your dispute with the IRS is complicated and the amount of back taxes, interest and penalties is high, it might be best.
As a rule of thumb, if your debt is less than $10,000, it’s usually best to contact the IRS yourself to try to arrive at a payment agreement. If your debt exceeds that amount but is less than $25,000, you should probably seek advise of a lawyer or tax pro. If it’s more than $25,000, contact a professional to assist in settling your tax debt.
Bankruptcy: Does It Ever Work?
Bankruptcy can eliminate your tax debt, but it’s not a sure thing. You need to examine your finances through the lens of the Chapter 7 and Chapter 13 bankruptcy codes to see if you qualify for a discharge of tax debt. You should also remember that bankruptcy can have severe financial consequences that can damage your credit rating, making borrowing extremely difficult for years after the bankruptcy is settled. It can also force you to liquidate nearly all your assets to satisfy creditors.
Other Tax Relieving Options
If you can take steps to lower you tax debt to $50,000 or less, you can qualify for an IRS installment payment plan. If you have credit cards, particularly those that offer cash-back rewards, it might be wise to pay down your tax debt to $50,000 with plastic.
Racking up credit card debt that you can’t repay within a month is often a bad idea, but if it allows you to avoid IRS penalties, it might work for you. Before using credit cards for taxes, make a budget so you know you can afford to make payments. You should also consider discussing your plan with a debt management or credit counselor.
Finally, if you enter an installment agreement with the IRS, make sure you make all payments on time. The IRS has little patience for those who don’t stick to their agreement and it will quickly impose penalties and back interest on your tax 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].
- NA, ND. Offers in Compromise. Retrieved from: https://www.irs.gov/taxtopics/tc204
- NA, ND. Innocent Spouse Relief (Including Separation of Liability and Equitable Relief). Retrieved from: https://www.irs.gov/taxtopics/tc205
- NA., ND. A Comprehensive Guild to Settling IRS Debts: An Interview with David Bauman, EA, of JK Harris. Retrieved from: https://www.thebalance.com/settling-irs-tax-debts-3193107
- Perez, W. (2018, April 16) . How to Get Out of Tax Debt. Retrieved from: https://www.thebalance.com/getting-out-of-tax-debt-3193404
- Fishman, S. (ND). Can You Really Settle Your Tax Debt with the IRS for Pennies on the Dollar? Retrieved from: https://www.nolo.com/legal-encyclopedia/can-you-really-settle-your-tax-debt-the-irs-pennies-the-dollar.html