For one reason or another, many of us may find ourselves in tax debt to the IRS at some point in our lives. Whether it’s through forgetfulness, miscalculations when you file your taxes, a major life event, lack of knowledge, or any number of other reasons, sometimes this tax debt gets so high that it can drastically change your life for the worse. Luckily, there are many ways to take your IRS tax debt by the horns and improve your financial situation.
Being in tax debt is not uncommon. It happens to many people. In fact, 17% of federal taxes are not paid every year and collectively, citizens owe the IRS $114.2 billion in back taxes. Being in tax debt to the IRS isn’t an instant criminal act — thousands of normal people every year find themselves in this situation.
You go into tax debt for reasons such as not filing your yearly taxes, your employer not withholding enough taxes from your paycheck, or underreporting your income. But whatever the cause, one thing is for certain: The IRS will come to collect eventually. The default method of paying your tax debt is to pay it off in one lump sum. But when that number gets too high, this isn’t an option for many people.
When the IRS informs you of your tax debt, you must take action. Ignoring your tax debt only leads to more tax debt or other issues like levies or criminal charges. Below are a few of the methods and tools you can use to start taking control of your tax debt and find your way back to financial freedom. But first, let’s go over a few important points about what happens when you find yourself in IRS tax debt.
Being in tax debt to the IRS can make your life more financially difficult, due to things like wage garnishment and other levies. These are methods the IRS uses to make you pay for your outstanding tax debt, and they can range from inconvenient to life-altering. Let’s cover what these are before we help you figure out a way to address them.
An IRS levy allows the seizure of your property in order to pay for your debt. Levies might also include seizure of your home, vehicles, bank accounts, or any other personal property the IRS decides you can use to pay off a chunk of your tax debt. A levy is the government’s claim on the value of these properties, and once they make the claim, your only option is to reach out to the IRS to work out a deal.
To remove the levy, you can either pay off your tax debt or make a compromise with the IRS via one of the payment plans they offer. The IRS will send you a notice that they plan on issuing a levy for your property. It’s important you act to avoid it as soon as you are aware the IRS is planning on issuing the levy. Ignoring a levy means you are simply waiting for the IRS to come and collect on your property.
You can do a few things to prevent the bank levy. You can quit your job, file for bankruptcy, file an appeal, etc. But one of the most efficient ways to stop a bank levy is to make a compromise with the IRS through an installment agreement, offer in compromise, or filing for Currently Not Collectible Status.
Wage garnishment is a specific type of levy. When the IRS garnishes your wages, they are taking a portion out of the money you make to fund your payments toward your total tax debt. To do this, the IRS calls your employer, if you have one, to inform them they will be garnishing your wages. Your employer is required to comply. The IRS doesn’t have have to go to court to be allowed to start garnishing your wages. How much they take depends on different factors, like the number of exceptions you claimed on your taxes. Once the IRS decides how much you need to live on, they may take the rest of your paycheck.
The situation, however, is not all bleak. The IRS has developed numerous ways for you to find the best way to pay your taxes. Their tax debt relief programs exist to give you options on how to handle paying your federal tax debt.
IRS tax debt relief programs exist to help you avoid the above actions from the IRS and to help you make an easier time of paying your taxes. The IRS wants you to pay what’s owed to them, but they want to give you options on how in order to keep you from entering into extreme financial hardship. Each program requires you or a tax professional acting on your behalf to reach out to the IRS to come to some sort of compromise on how you will pay your tax debt.
You can try to take on the IRS yourself in order to get the ball rolling on the methods and tools we list in this article — you have nothing to lose. There is plenty of research material out there that you can use to understand your tax debt situation and figure out what the best course of action is for you.
But if you want the best results, there are great services out there that can help you reduce and remove your tax debt. Solvable aims to give you the tools you need to take steps toward getting free of your tax debt. Our reviews of tax debt relief services give you an idea of which companies and organizations are the best fit for you and your financial situation. Let the professionals go to bat for you, so you can be assured you’re getting the best deal possible.
Here are the eight methods you can use to make your IRS tax debt manageable and work your way back to financial freedom:
If you owe less than $50,000 in tax debt, you may be eligible to pay off your debt in more manageable monthly payments. This agreement with the IRS can make paying off your tax debt less of a burden on your monthly expenses. The nature of your monthly payment plan will depend on a few factors, such as how much you owe, the total value of your assets (car, home etc.), and your necessary living expenses. With this information, the IRS will offer you a time frame and monthly payment amount to pay off your debt.
With a monthly payment agreement, you can extend the amount of time you have to pay off your tax debt. Instead of paying the entirety of your tax debt today, you can spread the burden out over time. This is one of the most common methods people use to make paying off their IRS tax debt more manageable.
To request a monthly installment plan, you will need to fill out Form 9465. There are fees to set up a monthly payment plan. The more long-term your plan, the more you’ll have to pay in fees. You’ll also pay interest on your tax debt until it is paid off in full.
A partial pay installment agreement is a decision you and the IRS make together about how much of a monthly payment you can afford to make to pay off your current tax debt total. The most attractive aspect of this method is that once your payment term is up, the rest of your tax debt is forgiven. This option is only available to you if you owe over $10,000 in taxes. You also can’t have any bankruptcies or extensive assets.
This is a compromise that can give you enough financial room to live more comfortably while working toward being tax debt-free. You will set up the agreement with the IRS, decide on the terms of how much you’ll pay each month and how long you’ll make the payments, and then once the terms of your agreement is over, the rest of your tax debt is forgiven.
To apply for a partial pay installment agreement, you’ll use Form 433 and Form 9465. To qualify for a partial pay installment agreement, you have to meet these requirements:
What’s an Offer in Compromise deal? It’s another method you can use to reduce the total amount of taxes you owe to the IRS. Read on:
The IRS’ Offer in Compromise program lets you pay less tax debt than your total owed. If you can prove that you are unable to pay for the full amount or that doing so will lead to significant financial hardship, you may be able to work out a deal with the IRS to pay for a smaller, more manageable amount.
To take advantage of this program, you will have to reach out to the IRS with information about how much tax debt you have, your income, your expenses, and your assets’ values. Once accepted into the program, you will work with an IRS agent to figure out how much of your tax debt you can pay, and how long it will take you to pay it. The IRS urges people considering applying for an Offer in Compromise agreement to only do so as a last resort when you’re sure you will not be able to pay the full amount of your tax debt.
To make the call to the IRS to request the Offer in Compromise, you can either ask a tax professional to speak to the IRS agent, or you can do it yourself. If you’re nervous about making the call and you’re not sure what to say to get the ball rolling, you can use Solvable’s Offer in Compromise script to ask the same questions your tax professional would ask. This script takes much of the guesswork out of the process, giving you an idea of what you need to have and say to get an Offer in Compromise agreement.
It’s important that you know what you need before you try to apply to an Offer in Compromise agreement, so you can get the best deal for your situation. This option won’t be the best choice for everyone, but for some, it’s the best one to pursue.
You may be able to work out a stair-step installment agreement with the IRS. This type of payment agreement means that you will pay smaller amounts at first, and then more after time goes by. For instance, you will pay a significantly smaller amount for the first year, and after month 12, the payments get larger to let you catch up to your full payment due. Like a long-term monthly payment agreement, you will have a final due date, but the amounts throughout your term start small and get larger.
This a great option for those who need to pay off other expenses soon or will be more financially stable after a year or so. This is a variation of the traditional IRS installment agreement that might appeal to people in certain circumstances. The IRS wants its tax money and will give you options in order to better allow you to pay. To get a stair-step installment agreement, you can hire a tax debt resolution firm to do the talking for you, or reach an IRS agent yourself to see if you’re eligible for this payment method.
The IRS Fresh Start Program lets you pay off your tax debts over several years of payments. When you are accepted into the Fresh Start program, you will be able to avoid penalty fees, levies, and wage garnishments. This program can be a powerful tool to let you catch up paying your tax debt while not having to sacrifice quality of life to do so.
To be eligible for the program, you cannot owe more than $50,000 in IRS tax debt. You will make payments on your tax debt in one of three ways: an extended installment agreement, an Offer in Compromise, or a tax lien withdrawal. We have covered the first two in this article, so we’ll just address the third.
A tax lien is essentially a placeholder for the government to eventually seize your property. It exists to guarantee payment toward your tax debt. When you enter the Fresh Start program, you can have this tax lien withdrawn, so you can pay the IRS via a direct debit installment agreement. This draws money out of a debit account to make payments toward your tax debt.
Navigating through the muck and complexity of IRS tax debt can be exhausting and confusing. If you want assistance navigating through your debt, and you want to make sure you are taking the best route of action to reduce and remove your debt, IRS tax resolution firms can help you with your situation.
These IRS tax relief companies will often be staffed by tax experts, CPAs, tax attorneys, etc. — basically, anyone who’s familiar with how to get someone out of an IRS debt sinkhole.
The more complicated your tax debt situation is, the more it’s recommended you seek out a quality IRS tax debt resolution firm. These teams can work with you to put you in the best financial standing in your tax debt situation. They will also act as a third party between you and the IRS to work out the best deals for you. They will be able to help you with a number of tasks and situations, such as:
Be sure you research the IRS tax resolution firms you’re thinking of hiring to go to bat for you. Some of these firms ad impossible results and prey on people looking to improve their financial standing with the IRS. Be sure to read our reviews of some of the most popular firms to make smart decisions on which you should employ.
Tax relief companies sometimes have a bad reputation because of scams. It’s important you do your research into these companies before working with them. We suggest using our reviews of these IRS tax relief companies to know who to trust and who to avoid before you give anyone your hard-earned money. There are companies out there that have the knowledge you need to get your tax debt under control — you just need to distinguish between the ones who want to help and the ones who just want your money.
When your tax debt starts rising past the $10,000 mark, you may want to seek out help from a tax attorney. Tax debt and how it’s going to affect you can be mind-numbingly complex. It’s a tax attorney’s job to understand what is happening with your particular case and help you decide the best course of action for your situation.
When your debt is under that $10,000 mark, you can reasonably handle the situation yourself. But above that, a tax professional is a great asset and tool at your disposal. This is doubly true if the IRS decides to press criminal charges against you because of your tax situation.
Hiring a tax attorney isn’t just a reactionary measure. You can also employ one to make sure that your taxes are in order so you don’t find yourself in a trying situation with the IRS again. Tax attorneys may act as consultants for you and your business if you have one, to make sure you’re taking the right steps to avoid being knee-deep in tax debt.
Filing for a “Currently Not Collectible” status, or CNC for short, is another method people use to take on their IRS tax debt. When you successfully apply for this status, the IRS considers you unable to pay for your tax debt and they stop pursuing you to make payments on it.
To qualify for CNC status, you have to prove that you are currently in a dire financial situation that makes you unable to pay your tax debt. An IRS tax agent will look at your income and assets to decide whether you’re eligible for CNC status before they grant it.
Once you’ve been filed under CNC status, the IRS will cease collection attempts and tax levies. They will stop garnishing your wages and defer your debt payments. Keep in mind that your debt payments are deferred — not erased. Eventually, your situation will be reevaluated to see if you should stay in CNC status or if you should start making payments again. How long that is depends on your case.
To apply for CNC status, you will need to thoroughly prove your financial hardship through paperwork. If you want to know exactly what you need for your particular case, you can always call the IRS to start the process of applying for CNC status to have them tell you what you’ll need to send to them. You can have a tax professional call them, as well. Generally, you will need to give them:
All this information will be used to fill out Form 433-A. This is the form that helps an IRS agent decide if CNC status is right for you. CNC status exists to protect you from your tax debt when you simply have nothing left to pay it with. It’s not right for everyone who’s trying to control their tax debt, but it’s there for people who need time to get back on their feet.
Many or most of these methods are at your disposal in your fight for financial freedom. Depending on your situation, some methods may be more beneficial than others, but you’re likely a good candidate for at least a couple of them. Taking your IRS tax debt by the horns starts by taking the first step in helping yourself.
If you need to do a little more research to find which options are best for you, Solvable is here for you. We do much of the legwork for you by tax debt relief companies who offer their services to you. We also offer you the research materials you need to better understand what’s happening in your financial world. From tax attorneys to the ins and out of federal and state taxes, you can find plenty of advice and reading material in our research library.