Dealing with tax debt can be a stressful and financially straining situation, especially if you’ve accumulated a large amount of debt over several years. The IRS does not take debts lightly, and can be persistent in their attempts to collect. If you’re feeling the strain of your federal tax debt and you’re looking for a way out, you might actually have more options than you realize. In fact, there are 5 basic options available for taxpayers to settle their debts with the IRS. Here’s a bit about each of them.
An installment agreement is the IRS’s term for a payment plan. Contrary to what you might think, the IRS doesn’t actually want to take collection measures against you. They would much rather work out a payment plan that allows you to pay off your debt over time. This is not typically something you want to attempt to do on your own, and we strongly recommend that you work with one of our CPAs to set up your installment agreement.
We’ll help you figure out just how much you owe in unpaid taxes, including penalties and interest. Then, we’ll submit the forms to request an installment agreement. You can even choose the day of the month and the amount that you are able to pay each month. There are certain qualifications you must meet to receive an installment agreement, but we can walk you through these as well. If your request is approved (and it usually is, if you meet the qualifications), you’ll make monthly payments to the IRS until your debts are covered.
Partial Payment Installment Agreements
For those with extremely high tax debts, the IRS will sometimes offer a partial payment installment agreement (PPIA) to help you settle your debts. You have to owe at least $10,000 to the IRS and not be in bankruptcy, as well as meet a few other criteria in order to qualify for a PPIA, but a CPA can walk you through the process to determine if you are eligible.
A PPIA differs from an installment agreement in that you don’t necessarily have to pay off the entirety of the tax debt. If you are approved by the IRS for a PPIA, as with a standard installment agreement, you will make regular monthly payments to the IRS towards your tax debt. However, the agreement only lasts for a specified period. As long as you make every payment throughout the agreement, the remaining debt after the term of the installment agreement is forgiven.
Offer in Compromise
An offer in compromise is another option that allows you to settle your tax debts for less than you owe. However, qualifying for this option is much more difficult and time consuming than the options above. You will have to submit a complete packet of documents, along with an application fee and initial payment, to the IRS. In the documents, you will submit an offer of how much you feel you are able to pay (either in a lump sum or through periodic payments) in order to settle the tax debt.
The IRS will examine your income, expenses, asset equity, and ability to pay, and compare these numbers to the amount offered. If they feel your offer is the most they can expect to collect in a reasonable period of time, they will accept your offer and you will be able to settle your debts following the terms in the package.
If for any reason you don’t qualify for the options above, you also have the option of filing for bankruptcy in order to help settle your tax debts. When filing for bankruptcy, you will have the options of filing a Chapter 7 or a Chapter 13 bankruptcy, and each of these treats tax debts in a different way. Generally speaking, Chapter 7 bankruptcy is the better option for settling tax debts, as many of those debts may be dischargeable, so long as they meet certain criteria. Speak to one of our CPAs to get more details on whether or not this is the right option to settle your debts.
Currently Not Collectible
If you’re experiencing temporary financial difficulties, you may have the option of being declared “Currently Not Collectible” by the IRS. To qualify, you must have little to no money left over after paying for basic necessities like utilities, rent, and groceries. If this is the case, the IRS will set your account to the “Currently Not Collectible” status and will hold off on any attempts to collect on your tax debt.
This can give you some much-needed breathing room as you get back on your feet and get your finances back in order. However, bear in mind that the tax debt is still there, and it is still collecting interest. Still, this is a good option for anyone who expects to have the funds to pay off their debts soon, but wants to avoid collection actions from the IRS.
If you have unsettled tax debts with the IRS, contact our tax settlement firm online, using our contact form, or call (908) 272-4451. We’ll help you to determine which settlement option is right for you.