Need IRS Tax Debt Relief? Here’s What You Have to Do to Get Help

Ben Franklin famously said, “In this world, nothing is certain except for death and taxes.”

Life gets in the way, and we get it. There are more important things in life than dealing with taxes until you get that dreaded letter from the IRS that threatens your very existence.

Thankfully there are options for tax debt relief.

Does the Internal Revenue Service Forgive Tax Debt?

It is rare for the IRS to forgive tax debt, but the IRS offers several relief options for taxpayers who owe unpaid taxes. The IRS can forgive your debt if you prove hardship under the Currently Non-Collectible status. It is challenging to qualify for this, but other options are available if you have tax problems. Read on to learn about other tax debt relief options.

IRS Debt Relief Programs

Tax debt relief is how the government helps you when you can’t afford to pay your tax bill. Eligibility for IRS tax debt relief is based on the circumstances regarding your unpaid debt. Here is a rundown of the forgiveness and relief options:

Installment Agreements (Payment Plans)

Not paying your taxes on time could cause the filing of a Notice of Federal Tax Lien and/or IRS levy action. To avoid this, you can request a tax payment plan that will extend the amount of time you have to repay the full amount of your taxes. If you qualify for a short-term payment plan, you won’t have to pay a user fee.

Here are a few things you need to know about the installment tax debt relief plan:

  • Payment plans don’t get you out of paying interest and penalties. Those will continue to accrue until your balance is zero
  • If you owe more than $25,000, you will be required to make all payments by automatic withdrawal from your bank account and businesses that owe over $10,000
  • If you use a credit card to make payments, you’ll have to pay a processing fee of about 2%
  • If you use a debit card to make payments, you’ll have to pay a processing fee of about $2 to $4 per payment
  • If your adjusted gross income is at or below 250% of the poverty level, you may qualify as a “low-income applicant”
  • The running collection is suspended if you appeal due to rejection until the final decision

What Happens When I Request a Payment Plan?

The IRS is generally prohibited from levying when requesting a payment plan or an installment agreement. The IRS’s time to collect is suspended while the installment agreement is pending, until it’s reviewed again.

If your installment agreement request is rejected, the collection period will remain suspended for 30 days. If your installment agreement is accepted but you default on payments, the IRS can terminate your contract, and collections will resume 30 days later. If you appeal an IRS rejection or termination, the IRS will suspend the collection for an additional 30 days.

Payment Plan Eligibility and Costs

If your payment plan is approved, there may be some fees.

Short-Term Payment Plans With 180 Days or Less

You are eligible if you’ve filed your taxes and owe less than $100,000. The short-term payment plan is a free service. The Short-term Payment Plan is available to individuals only. You can apply by phone, mail, or in-person with a $0 setup fee up to 180 days to pay back. You can pay by direct deposit, check, money order, or debit/ credit card, but card fees apply.

Long-Term Payment Plans / Monthly Payments

You’re eligible if you’ve filed your tax returns and owe $50,000 total or less in tax. There’s a setup fee for the long-term payment plan or installment agreement online application.

If you pay through automatic withdrawals:

  • $31 to apply online
  • $107 to apply by phone, mail, or in-person

If you pay by another method:

  • $149 to apply online
  • $225 to apply by phone, mail, or in-person

Apply online through the IRS Online Payment Agreement tool or by phone or mail by submitting Form 9465, Installment Agreement Request.

Do you think you might need to set up an IRS payment plan? Here’s more information to get started:

Minimum Monthly Payments

You can usually choose how much you’ll pay every month, and the IRS will ask how much you can afford. Long-term payment plans require that the payment amount is high enough to pay off your debt within 72 months.

Offer In Compromise (OIC)

Offers in Compromise let you settle any back taxes for less than the total amount you owe. OIC is an option if you have no way to pay your debt, or it would cause financial hardship.

The IRS will weigh your ability to pay, income and expenses, and total assets. The IRS acceptance rate for these is low, and qualifying is tough. The IRS site suggests exploring all other tax debt relief options before applying this choice.

To Apply For an Offer in Compromise

  • You’ll pay a nonrefundable $205 fee (low-income taxpayers can seek a waiver)
  • You’ll be required to make an initial non-refundable payment
  • Your tax returns must be up to date for the appropriate tax year. If you haven’t filed recently, you probably won’t qualify
  • IRS tax liens can remain in place until your offer is accepted and you’ve fulfilled the requirements
  • If you’re currently in bankruptcy proceedings, you won’t qualify
  • IRS collection activities will be suspended while your application is pending

While you may want to consult a tax professional before choosing this route, it is not required.

“Currently Not Collectible” Status

“Currently Not Collectible” status means your tax debt is delayed when you can’t pay your taxes or living expenses. It is a temporary status and is reviewed periodically, and if your situation changes, you may be required to start payments. It needs to be requested, and you may be asked to complete a Collection Information Statement.

What You Need to Know

  • “Currently Not Collectible” status won’t make your tax debt disappear. “Currently Not Collectible” is temporary, and The IRS will review the financial situation yearly
  • Tax liens can still be filed against you, but the IRS will remove them from active collections for the time being

Innocent Spouse Relief

Requesting this allows qualified applicants to avoid penalties stemming from tax fraud or inaccuracies the other spouse or former spouse knew nothing about.

Innocent Spouse Relief only applies to individual income or self-employment taxes.

What Is the IRS Fresh Start Program?

The Debt Forgiveness Act makes it easier for taxpayers to seek tax debt relief. The first step is getting caught up in filing your unfiled taxes, then hiring tax experts to start the process of freezing penalties. In addition to the options listed, the IRS Fresh Start Program makes it possible to have a federal tax lien withdrawn if you’ve taken action to address your tax liability.

Tax Relief Companies

Tax debt relief companies and certified public accountants (CPAs) offer tax help if you’re confused about the process, filling out forms, or how much you owe. However, most of them charge for items you can usually do on your own for free.

Tax Debt Relief Scams

As with anything in life, there will be scammers trying to take your hard-earned money and kick you when you’re down. Here are some widespread tax relief scams to look out for.

Bogus Promises to Settle Your Tax Obligations

These are deceptive advertisers claiming to settle your IRS debt for pennies on the dollar. The IRS determines tax debt relief via the Tax Code and the IRS Manual, and there’s no “secret code” that any of these companies are privy to.

Most of the salespeople connected with these companies are not licensed tax professionals, and their goal is to secure a deposit. Once you sign on with them, they take little action against your case.

They Tell You Tax Authorities Will Refuse to Work with You

Hang up, immediately call the IRS to address the tax issues, and don’t ignore the problem.

They Tell You They Can File an Offer in Compromise

These companies will claim to cut your tax debt by filing this. It isn’t easy to qualify for this, and most will not be eligible. The company will take your money knowing you will be ineligible, do nothing for you after they have taken your money, and won’t refund you.

Contact the IRS directly to see if you qualify for the Officer in Compromise program.

Tips for Consumers to Avoid Scammers

  • Research the companies you are considering
  • Contact the tax debt relief authorities at the first sign of trouble
  • Do not ignore problems — they won’t go away
  • Does it sound too good to be true? It usually is
  • Beware of money-back guarantees – they can offer a false sense of security
  • Know the fees – tax companies aren’t allowed to charge upfront fees
  • Read the fine print, and get all verbal promises in writing
  • Don’t believe anyone who promises a quick fix

There are a lot of tax debt relief scams, so research any company carefully. Look for places that offer a free consultation to determine whether you need these services and make sure you trust the person you choose.

Here are some tips and statistics from the Federal Trade Commission: https://consumer.ftc.gov/articles/tax-relief-companies

Phony Calls and Texts from the IRS

If you get a scary call or text from the IRS, don’t panic. It almost certainly isn’t legitimate. Hang up and do not provide any personal information. The IRS will contact you by mail and not by email or text. If you ignore these warnings, you might get a call from the IRS, but it will not be a prerecorded call.

Bankruptcy and Income Tax Debt

There are two primary types of bankruptcy options for individuals: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

If your tax debt meets specific requirements, Chapter 7 bankruptcy could help you.

When you file your automatic petition for Chapter 7 bankruptcy, it triggers an automatic stay on all creditors, and they can’t contact you to collect debts. This automatic stay also applies to property. The IRS is forbidden from touching any of your more valuable assets.

Filing Chapter 7 will not discharge all tax debt. There are a lot of rules, including:

  • Chapter 7 bankruptcy only discharges income tax debt
  • Your debt will not be removed if you haven’t filed any required tax returns for the past two years
  • The income tax debt you owe must be at least three years old
  • Your tax assessment must be less than eight months old
  • If the IRS recorded a tax lien on your property before the bankruptcy filing, the lien would remain on the property

Chapter 13 Bankruptcy

In most cases, Chapter 13 bankruptcy will not wipe out your tax debts. Instead, the tax debt owed to the IRS will be repaid through your Chapter 13 repayment plan. Repayment plans usually last three or five years. There are some exceptions, though.

You can receive tax refunds while in bankruptcy. However, refunds may be subject to delay or used to pay down your tax debts.

Consult a bankruptcy lawyer to determine whether Chapter 7 or Chapter 13 bankruptcy would help your particular situation.

How Does Tax Debt Forgiveness Work?

You’ll use your financial situation to determine which tax debt relief plan you qualify for. Here are the typical steps of an IRS debt forgiveness plan:

  • Apply and be accepted to the right program
  • Agree to stay current with all tax returns going forward
  • Conform to all terms that the IRS puts forth regarding totals due, penalty abatement, and payment terms
  • Agree to allow the IRS to periodically reassess your financial status
  • Pay off the complete or amended debt total via lump sum or payment plan

The IRS will determine how much you need to pay based on your financial situation and tax debt circumstances. Of course, the first step is seeing if you qualify.

Be aware that it is rare for the IRS to forgive tax debt fully, but you might be able to qualify for another tax debt relief plan that helps avoid destroying your credit that goes along with owing back taxes.

Do I Qualify for IRS Tax Debt Forgiveness?

Talk to a tax professional, but there’s a good chance the IRS will be willing to work with you. To qualify, you need:

  • A tax balance that’s less than $50,000
  • A $100,000 income cap for single filers
  • A $200,000 income cap for married couples filing jointly
  • A drop in net income of 25% if you’re self-employed

How Does Tax Debt Forgiveness Work?

You’ll use your financial situation to determine which tax debt relief plan you qualify for.

  • Apply and be accepted to the right program
  • You must agree to stay current with all tax returns
  • You must agree to the IRS’ terms, including totals due, penalty abatement, and payments
  • You must allow the IRS to reassess your financial situation routinely
  • You must agree to pay off the complete or amended debt total by either a lump sum or a payment plan

The IRS will determine how much you need to pay based on your financial situation and tax debt circumstances. Of course, the first step is seeing if you qualify.

Benefits of Paying Income Taxes on Time

If you can’t pay the tax, you owe by your original filing due date. Your balance will be subject to interest, penalties, and fees. You could also face wage garnishment or have future tax refunds garnished.

If you can’t pay the total amount due, pay as much as you can and visit IRS.gov/payments to consider our online payment options.

It could also be worth exploring other payment options, like a debt consolidation loan, to avoid paying all the interest, penalties, and fees the IRS would assess.

The Bottom Line

An IRS tax debt relief agreement will approve nearly everyone who applies, but whether or not that’s your best strategy is better determined by a tax professional. They understand your tax debt and deal with the IRS. They are the professionals who can help you navigate your tax debt relief options.

FAQs

What If I Owe State Tax and Can’t Pay It?

If you fail to pay state tax, many states will levy or garnish your wages, and your employer must comply. Some states reach out to your bank to withdraw funds to pay down the balance.
File your return and pay whatever you can. The IRS will bill you for the rest. You can also file an extension to push it out. The IRS offers flexible payment agreements to those who can eventually pay the taxes they owe. If you cannot pay the taxes you owe, you can complete your return on time and file your return by the due date even without the payment.
These are monthly installment plans available. The short-term payment plan is where the payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties, and interest.

Will I Face Wage Garnishment If I Owe Back Taxes to the IRS?

The IRS can garnish your wages if back taxes are owed, but they must follow stringent guidelines. If you owe the IRS back taxes, the agency has the authority to levy or seize your property.
The IRS knows where you work. They provide several notices before issuing a wage garnishment. They will notify you over multiple months and give notice of wage garnishment directly to your employer, and it stays there until it is released. You will need to work with IRS Collections since you are under their enforcement. If you can prove hardship, then you can request a hardship release. Garnishment release can take 7-10 days via snail mail, so use fax to notify your employer. And check to make sure they received it.

Will Tax Deductions Decrease the Amount of Back Taxes I owe the IRS?

Deductions can reduce the amount of your income before you calculate the tax you owe. Tax credits can also reduce the amount of tax you owe, dollar for dollar, $10,000 in tax credits would mean $10,000 in tax savings.
You can also contribute to a retirement account, open a health savings account, check flexible spending accounts at work, and use a side hustle to claim business deductions, including a home office deduction. In addition to this, you can write off business travel expenses even while on vacation, use tax credits to offset higher education, deduct private mortgage insurance if you own a home and are paying this, and make a charitable contribution. Some states and local taxes have special breaks like in New Jersey, where taxpayers can deduct the cost of medical expenses exceeding 2% of their adjusted gross income.

What Are My Options If I Owe Back Taxes for my Small Business?

First off, do not ignore the IRS and keep in touch with them, lest you risk losing your business, and the consequences can be dire.
One benefit is that time is on your side, and the IRS threats are usually worse than their actions. The machinations of government agencies are slow to react, so you have time to strategize your next move. Never lie to the IRS but do not volunteer more than you have to.
Request an Offer in Compromise. Like individual filers, they offer payment plans for tax debt relief, and you can ask for a discount on the total amount you owe since there are compounding interests and penalties. One in four businesses can settle their tax bill through this option.
The only time the IRS truly shuts down a business is when there are unpaid payroll taxes. If you can prove a hardship for your small business, you can request to be temporarily put on “uncollectible status.” You will still owe them compounding penalties and interest, but they won’t try to collect from you.
You can file for bankruptcy to wipe out some tax debt as a last resort. We recommend always consulting a tax professional.

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