Owing money to the IRS can be stressful and the IRS can collect back taxes for 10 years (Collection Statute Expiration Date) from the assessment date(s). Your tax debt will grow over time as the IRS adds penalties and interest to your balance until it’s paid in full. They may even raise interest rates every few months.
If you don’t respond to IRS balance due notices or make payment arrangements, they’ll likely issue a lien, levy your bank account, or garnish your wages.
Fortunately, the IRS offers a number of ways to get relief from your tax debt before a lien or levy.
Here’s an explanation of IRS tax debt relief, who’s eligible for tax debt relief, tax debt relief programs and alternatives, and the tax debt relief process:
What Is Tax Debt Relief?
Tax debt relief covers a series of programs offered by the IRS to help people who owe back taxes and can’t pay.
Keep in mind, not all tax debt relief programs the IRS offers relieve you of your full tax debt. The IRS has strict rules about when and for whom they forgive or reduce tax debt. In order to qualify, you typically have to demonstrate not only an immediate financial hardship but one that shows no signs of improving in the near future.
That said, even if the IRS doesn’t grant you full tax relief to resolve your tax debt, they still offer several ways to pay it back in a manageable way.
Who Is Eligible for Tax Debt Relief?
Almost all taxpayers who owe money to the IRS are eligible for some form of tax debt relief, even if it’s just a short-term IRS payment plan or long-term installment agreement that allows you to pay your debt over time.
Tax Debt Relief Programs
The IRS offers four main types of tax debt relief programs.
Offer in Compromise
An Offer in Compromise, often called an OIC, is a settlement between you and the IRS for you to pay an “offer” amount that’s less than your tax debt.
There are two types of OIC offers you can make:
- A lump sum cash offer in which you pay the agreed amount all at once or in fewer than six installment payments in less than six months.
- A periodic payment offer in which you pay the balance in six to 24 monthly installment payments.
Currently Not Collectible Status
Currently Not Collectible (CNC) status – sometimes referred to as Hardship status – temporarily pauses IRS tax debt collection efforts. CNC allows you to get through a period of financial hardship without worrying about how you’re going to pay your back taxes.
While CNC status is in effect, all collection efforts cease, including letters, phone calls, wage garnishment, bank account levies, and federal tax liens. Currently Not Collectible won’t stop penalties and interest, however, from being added to your tax debt.
Before the IRS removes your CNC status, they’ll notify you in advance so that you can setup a repayment plan. In some cases, the IRS may approve Currently Not Collectible status as opposed to an OIC when they determine a taxpayer’s financial hardship is temporary.
An installment agreement doesn’t reduce your tax debt, but it does give you the opportunity to pay it off in more manageable monthly payments rather than all at once.
Your current income and debt/expenses determines your monthly IRS payment amount and the length of your installment term.
One benefit of an installment agreement is that most taxpayers with tax debt who apply will be approved. The IRS doesn’t restrict payment plans to only those with financial hardships.
Innocent Spouse Relief
If you filed your taxes jointly with a spouse and are now facing interest and penalties from something your spouse did that you had no knowledge of, you might qualify for tax debt relief as an innocent spouse. If so, the IRS will grant innocent spouse relief and absolve you of penalties from your spouse’s actions.
Tax Debt Relief Alternatives
Even with as many tax debt relief options as the IRS offers, you might find that none are a good fit for your tax situation. In this case, you can turn to a few alternatives to help you resolve your unpaid taxes without an IRS tax debt relief program.
- Second Mortgage: With a home equity loan or home equity line of credit (HELOC), this lets you tap into your home’s equity and use the cash to pay off your tax debt. Since the loan is secured by what is likely your most valuable asset, the interest rate tends to be low.
- Credit Card: A credit card might seem like the ideal place to shift your tax debt to, as the interest rate can be high, but if financial woes ever cause you to fall behind on payments in the future, a credit card issuer has fewer recourse options than the IRS.
- Retirement Plan: If you have a 401(k) plan, you can borrow from it to pay a tax bill without incurring an early withdrawal penalty as long as you pay it all back within five years.
Tax Debt Relief Process
Although the IRS tries to make its tax debt relief programs as accessible as possible, you still have to do some work to get approved. Here are the steps in the tax debt relief process:
Determine Your Outstanding Tax Balance
First, you need to determine how much you owe in taxes, penalties, and interest. You can view your tax balance due by logging in to your IRS tax account online at https://irs.gov/payments/your-online-account. You’ll just need to verify your identity if it’s your first time logging on.
Gather Your Tax Records
If you don’t still have your tax documents from the tax years in question, you can get your tax records a few different ways. One is to contact the HR department at your employer or past employers.
Another is to request a tax transcript directly from the IRS either online at https://irs.gov/individuals/get-transcript, by mailing Form 4506-T to the IRS. You can also try calling the automated transcript service at 800-908-9946.
Note that if you choose to work with us at Wiztax (see below), we can manage all of this for you at no additional charge.
Apply for an Offer in Compromise or Currently Not Collectible Status
Once you know how much you owe and you have all of your tax records, you can decide if you think your current financial situation gives you a good chance of getting approved for an Offer in Compromise or Currently Not Collectible status.
At Wiztax we never charge for consultations or ‘investigations’ and we can tell you exactly how we can help. Get started for free so we can find the best tax debt relief program for you. If you prefer, you can call us at 866-568-4593 or schedule a free call.
Set Up an IRS Payment Plan
If you choose not to apply for an Offer in Compromise or Currently Not Collectible status, the next-best option is to set up a monthly installment agreement with the IRS. This will give you more time to resolve your unpaid taxes instead of having to pay the full amount in one payment. While we are happy to help you, you can likely do this yourself. Just visit the official IRS website for more info.
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