Learning How to Pay Off Tax Debt

BJ Lynch
Expert Contributor
Last Updated:
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Finding yourself owing a debt to the IRS can be disruptive. It’s stressful enough having the debt, but when the IRS is involved, it changes everything. Life happens, and anyone could find themselves being faced down by the IRS. If you are grappling with how to pay off a tax debt, we invite you to use our services at Solvable to connect with a tax debt professional today.

Tax Debt and Actions the IRS Can Take Against You

In short, tax debt is when you owe money to the government at a federal or state level. For this article, we will focus on federal taxes involving the IRS. Federal taxes under the jurisdiction of the IRS are:

  • Income tax.
  • Gift tax.
  • Estate tax.
  • Employment taxes

Income tax is taken from income made throughout the year. It also includes properties earned from work, through a business venture, or from investing wisely.

A gift tax is taken from the gifts you give. Gifts such as birthday, wedding, or house warming gifts are not under fire here. Taxes on gifts are when that gift is substantial, meeting or exceeding a clearly defined dollar amount. An estate tax is taken from the gifts you make at death. This refers to gifts that are outlined by a trust, a will, or some other means by which the gift is awarded.

Federal employment taxes include federal income tax, Social Security and Medicare taxes, additional Medicare tax, and Federal Unemployment (FUTA) tax. Federal income tax is the tax withheld from employees’ wages by an employer. Social Security and Medicare taxes are also withheld from employees’ wages by an employer.

Learning How to Pay Off Tax Debt

The employer pays taxes to Social Security and Medicare that matches that of their employees. An additional Medicare tax of 0.9% is withheld from employees’ wages by the employer when a set threshold of compensation to an employee has been surpassed, which is determined by the employee’s filing status. FUTA taxes are only reported and paid by the employer from the business’ funds.

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When taxes are left unpaid, the IRS can take actions against you to satisfy the debt. Just a few of the avenues the IRS uses to collect tax debts are tax liens, IRS levies, and the Employment Taxes and the Trust Fund Recovery Penalty (TFRP). Tax Liens can put your personal or business assets at risk. Personal assets that can come under fire are houses, vehicles, and properties. Business assets that could be at risk are buildings, equipment, properties, and vehicles.

When an IRS levy is in force it can garnish wages, take money that is in your bank account or any other account that holds your finances and can seize assets such as houses, vehicles, real estate. Seizure of the assets leads to the IRS selling them to satisfy your debt. The Employment Taxes and the Trust Fund Recovery Penalty (TFRP) is a law passed by Congress that allows the IRS to enforce the TFRP on an employer who has not paid the employment and income taxes withheld from their employees to the IRS when required.

As you can see, the IRS can collect unpaid taxes by any means necessary, no matter the cost to you or your business. Settle your tax debts and don’t let it come down to IRS collection efforts. Pay what you can afford up front and then work to settle the balance as you can.

How to Pay Off Tax Debt

Dealing with the IRS can be a stressful experience. Don’t lose hope; you may qualify for options offered by the IRS. IRS repayment plans include the:

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  • Pay now option
  • Short-term payment plan option.
  • Long-term payment plan option.
  • Offer in Compromise (OIC).

The pay now option requires that you pay in full with one payment. You most likely won’t have the funds available to take advantage of this option, but it is available. If the IRS approves a short-term payment plan, it will require that you pay the debt in full within 120 days.

There are two long-term payment plan options available. The first long-term payment plan requires automatic withdrawals and allows for you to pay the debt in more than 120 days. This plan requires payment from direct-debit or a Direct Debit Installment Agreement (DDIA). The other long-term payment plan doesn’t have automatic withdrawals and also allows for you to pay the debt in more than 120 days. This plan does not require direct-debit. The IRS will apply interest and penalties to payment plans when applicable.

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An OIC is available to those that qualify. If the IRS accepts an OIC, you can settle your tax debt for less than you owe. Strict requirements must be met and withheld throughout an OIC.

Once the IRS establishes that you owe money, only you can decide the best route for paying off the debt. When paying off tax debt without using an IRS payment plan or an OIC, you may find it takes getting creative. A few ways you could pay off tax debt that is out-of-the-box are paying with a credit card, having your home re-financed, and requesting more time from the IRS.

Paying with a credit card can be useful if you are having trouble paying by the required time. Paying with a credit card will allow the debt to the IRS to be satisfied on time leaving you to deal with the credit card company.

Having your home re-financed allows you to take advantage of your home’s equity to pay off IRS debt. This could be worth it, considering the risk to your assets. Mortgage rates are low, and the interest from your mortgage can be deducted from your income taxes if you itemize. Asking the IRS for a time extension to pay your debt is a little-known option. Depending on the circumstances surrounding your IRS tax debt, you could qualify for an additional 60 to 120 days to pay the debt in full.

No matter your situation, knowing how to pay off tax debt can seem overwhelming. The best way to avoid tax debt is to maintain your taxes by filing them on time, paying what is owed, and retaining all related documentation. Don’t just sit idle, take the initiative by actively researching your options.

 

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BJ Lynch
Expert Contributor
Last Updated: