If you’re unable to pay your taxes, you aren’t alone. More than 10 million Americans faced late payment penalties annually according to data from the IRS reported by Nerd Wallet. Fortunately, tax repayment help is available, ranging from plans that allow you to pay your past-due taxes overtime to tax relief through bankruptcy. Here’s what you need to know if you’re facing IRS debts you can’t afford.
If you expect to owe the IRS, you might put off filing your tax return, but this strategy is much more costly in the long term. The monthly penalty for unpaid taxes is 0.5 percent of your balance, compared to 5 percent of your balance monthly if you fail to file. That means if you don’t file taxes, you’re multiplying your penalty by 10 compared to filing but not paying.
What’s more, you can eventually face criminal penalties, including jail time, for failing to file your taxes. That’s not the case for failure to pay.
If you have a legitimate reason for failing to file your tax return, such as lost records or paperwork, apply for an extension to the filing deadline as soon as possible.
When it comes to dealing with the IRS, ignoring the problem is never the best route. The sooner you take action, the better it will be for your overall financial situation. Read each notice you receive from the IRS carefully, as it will contain important information about how to proceed and deadlines such as the amount of time you have to file an appeal.
The IRS provides options for taxpayers who can’t fully pay their balance within 120 days of their tax assessment.
You can request an installment agreement if you need to pay your balance over time, provided you owe less than $50,000, including assessed interest and penalties. Keep in mind that entering a payment plan is sometimes associated with fees and additional interest, so read the agreement carefully before signing. You can pay off your balance within 72 months through convenient monthly direct debit. To apply, file IRS Form 9465 Installment Agreement Request or use the Online Payment Agreement tool. If you are requesting an automatic payment plan, the application fee is $31 to apply online or $107 for a phone application. Non-automatic plans cost $149 to apply online or $225 to apply by phone. The application fee is reduced to $43 for applicants who are considered low-income under the federal poverty guidelines.
If you can prove that you are insolvent, which means you have more debt than the value of your assets, you can request that the IRS list your account as Currently Not Collectible (CNC). However, you’ll eventually have to pay, and the debt continues to accrue interest and penalties during the length of the CNC status.
Request an offer in compromise (OIC), in which the IRS agrees to settle your account for less than the full balance owed. To qualify, you must show that paying the full amount would create an undue financial hardship. Approval for an OIC is rare, so you should pursue this route with the advice and guidance of a qualified tax attorney. The IRS typically only approves an offer when it represents the highest amount it could reasonably expect to collect from you before the statute of limitations on tax debt expires (10 years). For example, any tax refunds you receive during this time are applied to your tax debt separate from the accepted offer.
In rare cases, the IRS may offer penalty abatement. This wipes out tax penalties for those who have been unable to pay due to hardship. Abatement of interest charged on past-due tax debt is quite rare, however. Avoid engaging with a tax relief company that promises to wipe out your IRS penalties and interest. These programs are available only to specific taxpayers under a very limited set of circumstances.
Programs for relief of tax debt at the state level vary by state. For example, some states offer penalty and interest abatement while others do not. Check with the Office of the Comptroller for your state to learn more about available relief programs.
If you have good credit, you may be able to get a personal loan or credit line to pay off your tax debt. You should only pursue this option if you can qualify for an interest rate lower than the interest charged by the IRS. If you opt for a 0 percent interest credit card, make sure you pay the balance completely before the low introductory rate expires.
Those in significant debt in addition to their tax debt may consider filing for bankruptcy. Bankruptcy wipes out certain types of income tax debt as well as unsecured debt such as credit cards and medical bills. Talk to a CPA or a bankruptcy attorney about the tax consequences of filing Chapter 7 or Chapter 13 bankruptcy.
When your tax debt is unpaid, the IRS will place a lien on your property. A lien allows the federal government to claim the property to satisfy your past-due balance. Tax liens can be placed on bank accounts, real estate, vehicles, and other personal property. You can even have a lien placed on future wages, which allows the bank to garnish your paycheck to pay the IRS.
If you receive more than one Notice and Demand for Payment from the IRS and do not respond, you will receive a Notice of Federal Tax Lien. The only way to remove the lien is by paying your tax debt in full. You may be able to discharge the lien from specific property, which would allow you to sell or refinance the property to repay your debt.
Some taxpayers may qualify for a withdrawal of the federal tax lien through IRS Fresh Start Program. This program requires satisfying outstanding tax debt and filing all required tax returns for the past three years. If you are required to make federal tax deposits or estimated tax payments, these must also be current.
You can also qualify if you meet these conditions but have entered a direct debit installment agreement rather than paying your balance in full. This option is available to individual taxpayers who owe less than $50,000. Your agreement must repay the balance in full within 72 months. Previously, the Fresh Start program was open only to taxpayers owing less than $25,000 and had a shorter maximum payment term of 60 months.
Before your tax lien is withdrawn under the Fresh Start program, you must make at least three direct debit payments as agreed. You are not eligible if you have ever defaulted on an IRS installment agreement.
If you do not take action to repay your taxes or work with the IRS to come up with a solution once you have received a tax lien notice, the agency will send you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This notice outlines the intention of the IRS to seize personal property to satisfy your tax debt.
If your account reaches this stage of collections, you should speak with a qualified tax attorney immediately. You have the right to appeal the amount of tax debt and request CNC status if you are unable to pay the balance without hardship. However, you need to provide extensive proof of your financial situation.
A tax lien will appear on your credit report and have a negative impact on your credit score. The extent of this impact depends on the age of the tax lien, the total amount of debt under the lien, and the amount that remains unpaid. The older your debt and the smaller the amount, the lower the impact on your credit score.
The most foolproof way to have a tax lien removed is by paying your tax debt in full. If you are unable to do so, you can request removal of a lien by enrolling in the Fresh Start program, arranging for an installment agreement, or successfully applying for an offer in compromise. After taking one of these paths, you must file IRS Form 12277 to request removal of the lien. You should submit copies of this request to all three credit bureaus (Equifax, TransUnion, and Experian), along with proof that the debt is paid.
If you’ve ever watched daytime TV, you’ve seen ads for companies that promise to reduce your tax debt for a fraction of what you owe. Before signing on the dotted line, though, it’s important to evaluate the business in question to ensure it will deliver what is promised. Check with the Federal Trade Commission (FTC) to find out whether the company has been the subject of customer complaints. Some companies charge nonrefundable fees of thousands of dollars and do not deliver on their promises to arrange for tax debt forgiveness. They may neglect to determine whether you are eligible for an offer in compromise before taking your money or even fail to submit offer in compromise paperwork to the IRS.
Do not pay money upfront for this type of service before doing your due diligence to thoroughly research the company. When you do enter an agreement with a legitimate company, review the refund policy before signing any documents. A high default billing rate is a red flag, as is an agreement that does not allow your fee to be refunded if a debt relief settlement is not reached. According to the FTC, sIgns of a tax debt relief scam include:
Only certain individuals are allowed to represent you in official IRS proceedings, which are required for any type of tax debt relief. If the debt relief company does not provide representation from a certified public accountant, enrolled agent, or tax attorney, it will not be able to negotiate with the IRS on your behalf. Remember, only the IRS can make the final determination to forgive tax debt, penalties, or interest.
If you encounter a tax debt relief company that promises to release you from tax liabilities, misrepresents the amount of time it will take to process your application for relief, or omits important information on statements submitted to the IRS, you can make an official complaint. This requires filing Form 14157: Complaint: Tax Return Preparer. You should also file a complaint online with the FTC.
If you cannot afford an attorney to negotiate with the IRS on your behalf, you may be eligible for assistance through the low-income taxpayer clinics, a program managed by the Taxpayer Advocate Service with locations across the nation. This service is also available for taxpayers who speak English as a second language. The attorneys who work for these clinics can represent you during tax collection matters, audits, appeals, and disputes. Fees are assessed on a sliding scale based on income and may even be free for some taxpayers. In general, you must have income under the federal poverty threshold and no more than $50,000 in tax debt to qualify.
Taxpayer Advocate Service can consult with you about other tax problems as well. If you are having trouble receiving a response from the IRS or are experiencing economic hardship because of your tax debt, this agency provides assistance.
Seek help for your tax debt with Solvable. Answer a few simple questions about your finances to be matched with well-reviewed tax relief companies that can help you explore your repayment options and choose the best solution for your situation.