Tax debt relief: proven options for settling IRS debt

Having mountains of tax debt can be a scary position to be in, especially given there are steep penalties, interest, or even legal action from the IRS for failure to pay. Whether you owe the IRS because of a financial setback, an oversight, or a misunderstanding, your unpaid taxes won’t just disappear if you ignore them. 

The good news is that there are many options for settling your tax debt so that you can find relief. Below, we’ll explore your options, the risks of doing nothing, and the most effective strategies for resolving your outstanding tax balances with the IRS.

Risks of ignoring tax debt

Having tax debt can range from a financial inconvenience to a serious legal issue. The IRS imposes significant penalties and interest on unpaid taxes, which will increase the total amount you owe them dramatically, thanks to compounding interest. This makes it much harder to pay off the original debt. Not only will you owe a lot more than you originally did, but the IRS can file a federal tax lien against your home, which can affect your credit score, and make it difficult to sell assets or get a loan in the future.

In addition to financial penalties if you don’t pay your tax debt, the IRS can take even more aggressive measures. These include garnishing your wages, seizing your bank accounts, or placing levies on your property. In some cases, taxpayers can face criminal charges for tax evasion. 

The longer your tax debt remains outstanding, the more severe your potential penalties and the fewer your options are for tax debt relief. Your best bet is to address it immediately, so you not only save on interest but also penalties and potential legal consequences for not paying it. 

9 strategies for settling outstanding tax debt

Whether you’ve received your first notice about money due or you’re past due and facing escalation, know that you’re not alone, and there are several programs offered by the IRS to resolve your tax liability. Getting ahead of any aggressive collection action will help avoid further stress and added penalties or legal ramifications. Here are some options to consider.

1. Installment agreement

An installment agreement lets you pay for your tax debt via monthly installments over time. Usually, you’re allowed up to 72 months to spread out your payments. While this will prevent the IRS from pursuing collections, you’re still going to accrue interest and penalties until your tax debt is fully paid. 

There’s usually a $22 set up fee if deducted automatically each month, or $69 for manual monthly payments, as well as a fee anytime you need to make changes to the agreement such as the bank account it’s drafting from or how much you pay per month. If you’re low income, this fee may be reduced or waived entirely.

2. Officer in compromise (OIC)

An OIC lets you settle your tax debt for less than what you owe. This is for people who would face significant financial hardship if they had to pay their entire tax debt or if there’s any doubt about the collectability of their tax debt. There are some pretty strict requirements for an OIC. You must first fill out Form 656 as an individual taxpayer. 

The IRS will then review your application as well as your income expenses, assets, and your ability to pay. This means that they’ll go through your finances with a fine tooth comb to evaluate your ability to pay. While this can reduce your total tax burden, you should know that not all situations will qualify and you must be approved for OIC. It’s best to consult with a tax advisor who can advise you on your particular situation.

3. Currently not collectible (CNC) status

When you’re unable to pay your tax debt, you can ask for a CNC status. During this period, the IRS will suspend all collection activities, including bank levies or wage garnishment. To qualify for CNC status, you must provide your financial information to the IRS proving that your tax burden prevents you from meeting basic living expenses. 

Penalties and interest will still accrue under CNC, and the IRS might file a federal tax lien, which can impact your credit score negatively. Periodically, the IRS will review your financial situation to see if you still qualify.

4. Penalty abatement

If your tax delinquency is the result of a reasonable cause, such as a natural disaster, serious illness, or other circumstances beyond your control, you can ask the IRS for a penalty abatement. The IRS will either reduce or remove penalties on your tax, which can lower the total amount that you owe the IRS. 

If you have a history of being in compliance with the IRS, you may qualify for first-time penalty abatement as well. To qualify for this, you must call the IRS or submit a written request explaining the situation and provide supporting documentation.

5. Innocent spouse relief

If your spouse or former spouse did not report income accurately, or improperly claimed deductions or credits on a jointly filed tax return, you could potentially qualify for innocent spouse relief. With this program, you won’t pay additional tax, interest, and penalties because of your spouse’s actions. 

There are a few different types of innocent spouse relief, including equitable relief and separation of liability relief. You must fill out Form 8857 within two years of the IRS starting collection action to qualify. This is a complex process, so reaching out to a tax advisor can be beneficial.

6. Partial payment installment agreement

A partial payment installment agreement is very similar to a standard installment agreement, except this allows you to make reduced monthly payments based on what you can afford after you account for all of your necessary living expenses. 

To qualify for PPIA, you must fill out Form 433-A or 433-F. The IRS will review your assets, income, and expenses to see if you qualify. There is a statute of limitation on tax collection, so you may end up paying less than what you owe.

7. File for bankruptcy

You might qualify for bankruptcy in certain situations. When you file for bankruptcy, whether it’s Chapter 7 or Chapter 13, the IRS will stop collection activities while you’re going through this process. Your tax debt must be at least three years old and you must’ve filed a tax return for at least the prior two years. Your tax assessment must also be at least 240 days old. 

This might seem like a quick and relatively easy way to get out of tax debt, but there are some long-term financial and legal implications with filing for bankruptcy, so it’s important to reach out to a bankruptcy attorney to discuss your situation beforehand.

8. Partner with a tax debt relief company

A debt relief company can help with your IRS tax debt. However, they only have access to the same routes you have as an individual. For example, they can negotiate with the IRS on your behalf, working to get you an installment agreement, offers in compromise, or penalty abatements, but you will be paying for the service. These debt relief companies usually have certified public accountants (CPAs) and tax attorneys who can help you navigate all of the IRS procedures. Some even help represent you in the event of an audit or can help stop wage garnishment or levies. 

However, you must remember that this can come at a significant cost when you can do it yourself anyway. If you still want to hire one so that you don’t have to deal with the IRS yourself, ensure that you’re checking reviews and accreditations, and be wary of any company promising guaranteed results because it’s up to the IRS whether they’ll accept any offer or arrangements.

9. Seek professional assistance

A CPA, enrolled agent (EA), or tax attorney can provide detailed guidance based on your individual financial situation. These pros can represent you before the IRS, negotiate on your behalf, or help you understand what options are available to you. You will pay for their advice, but it usually will be cheaper than dealing with a tax debt relief company.

The takeaway

If you have a lot of tax debt, it can feel incredibly overwhelming and stressful, but there are several options that can help you get control of your financial situation. Your options include an IRS installment agreement, offer in compromise, or penalty abatement, all of which deal directly with the IRS. Other options include working with tax professionals, such as a CPA, or filing for bankruptcy.If you don’t want to deal with the IRS directly, you can also work with a tax debt relief company. However, make sure to understand the fees you’re going to pay for using one, as well as the process involved to ensure it’s worth going through a middleman. Whatever you do, do not ignore the problem. Give the IRS a call to review all of your options. They are used to dealing with these options all day every day and can point you in the right direction. You want to take action as soon as possible to help protect your assets, avoid any further penalties and help solve this tax burden.

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