If you're facing IRS tax debt, you're not alone. In 2023, the IRS collected over $104.1 billion in unpaid assessments, but don't let that number intimidate you.
While tax relief services are an option, you can navigate this process independently with the right guidance. This article will help you understand your debt, explore payment options, and effectively communicate with the IRS.
Understand Your Tax Debt: Assessing What You Owe
Before you can settle with the IRS, you need to know exactly what you owe. The IRS provides several tools to help you assess your debt through its secure website. By logging into your account, you can access:
Tax records
Tax returns
Adjusted gross income
Tax transcripts
Tax compliance reports
Amounts owed, including penalties and interest
It's crucial to verify that all the information provided is correct. If you spot any discrepancies, address them with the IRS promptly. Remember, facing your tax debt head-on is the first step towards resolution.
Possible Payment Options: Installment Agreements and Offers in Compromise
Installment Agreements
An installment agreement allows you to pay your tax debt over time. The IRS offers two types:
Short-term payment plans: These last up to 120 days.
Long-term payment plans: These can extend up to 72 months, depending on how much you owe.
Offer in Compromise (OIC)
An offer in compromise (OIC) is a method of settlement with the IRS that allows you to settle your tax debt for less than you owe. This settlement option is only available to those who can’t pay their total tax debt without creating a financial hardship. Using Forms 411 and 656, the IRS assesses your income, expenses, and asset equity to determine if you qualify for an offer in compromise.
Applying for an Installment Agreement: Step-by-Step Guide
If you can't fully pay your tax debt, an installment agreement can be an effective way to settle with the IRS. Here's how to navigate the process:
Step 1: Determine Your Eligibility and Plan Type
Most taxpayers are eligible for installment agreements, but your specific tax debt will determine your options. The IRS offers both short-term and long-term plans. Short-term plans are available if you can pay within 180 days and owe less than $100,000 in combined tax, penalties, and interest. Individuals must owe $50,000 or less for long-term plans, while businesses must owe $25,000 or less. These long-term agreements can last up to 72 months.
Step 2: Choose Your Payment Method
The IRS provides several payment options. You can set up Direct Debit for automatic monthly payments from your checking account, which is often the most convenient choice. Alternatively, you can make electronic payments through IRS Direct Pay or EFTPS, or pay by check, money order, or credit/debit card (though fees apply for card payments).
Remember that if you owe over $25,000 as an individual or $10,000 as a business and are applying online, you'll need to use Direct Debit.
Step 3: Submit Your Application
You have several options for submitting your application. The fastest method is to apply online through the IRS Online Payment Agreement Tool. You can also apply by phone, mail (using Form 9465), or in person at an IRS office. Whichever method you choose, make sure you have your most recent tax return, the amount you owe, and your bank information on hand.
Step 4: Understand and Pay Setup Fees
The IRS charges setup fees for certain installment agreements, which vary based on your plan type, application method, and payment option. Short-term plans don't have a setup fee. For long-term plans, fees range from $22 to $178, with online applications and Direct Debit options generally less expensive.
If you're a low-income applicant, you may qualify for reduced or waived fees. It's worth noting that setup fees for long-term agreements are higher than those for short-term agreements.
Step 5: Set Up Automatic Payments
If you've chosen Direct Debit, you'll provide your bank account information during the application process. For other payment methods, set up recurring payments to ensure you never miss a due date. Remember, even with an installment agreement, penalties and interest will continue to accrue until your balance is paid in full, so it's best to pay as quickly as possible.
Remember always to file your tax returns on time, even if you can't pay in full, to avoid additional penalties. If your financial circumstances change, you can modify your agreement, though be aware that revision fees may apply.
Submitting an Offer in Compromise: How to Qualify and Apply
An Offer in Compromise can be a valuable option for settling with the IRS, but the application and qualification processes are more complex than other settlement options. Here's how to qualify and apply based on the information provided:
Step 1: Check Your Eligibility
The IRS carefully vets applicants for OICs because they're forgiving a portion of your tax debt. They only approve OICs if they believe you cannot pay the full amount owed. To be eligible:
You must be current with your tax filings
You cannot be in an open bankruptcy proceeding
To help determine if you meet the criteria, the IRS offers an online OIC Pre-Qualifier Tool. This tool can give you an initial idea of whether you might qualify for an OIC.
Step 2: Prepare and Submit Your Application
The only way to apply for an OIC is to complete and mail the application package to the IRS. The application packet must include:
Form 433-A for individuals or Form 433-B for businesses (This information needs to be as accurate and complete as possible)
Form 656
A $205 non-refundable application fee
Step 3: Submit the Offer Payment
When you apply for an OIC, you must include your first payment based on Form 656. This payment should be mailed along with your application packet. If your OIC is approved, you will pay the rest of the agreed-upon amount according to the terms set in the acceptance.
Exploring Temporary Delay Collection: Is It Right for You?
When you can't pay your tax debt due to financial hardship, the IRS offers an option called temporary delay collection. This approach isn't a settlement method, but it can provide some much-needed breathing room. If you qualify, the IRS may mark your account as "currently not collectible," temporarily pausing their collection efforts.
How to Qualify for Temporary Delay Collection
To qualify for this temporary relief, you'll need to provide comprehensive documentation of your financial situation. This includes proof of income, details of your expenses, and information about any assets you own. The IRS will carefully review this information to determine if you truly cannot pay your tax debt at the present time.
Impact of Temporary Delay Collection on Your Tax Debt
Keep in mind that this option doesn't eliminate your tax debt. The amount you owe remains, and you'll still need to pay it in the future. During this delay period, interest and penalties continue to accumulate. However, the primary benefit is time—you'll have an opportunity to improve your financial situation without immediate collection pressure from the IRS.
Preparing for Future Payment
While a temporary delay can be a helpful short-term solution, using this time wisely is crucial. Focus on stabilizing your finances so you can address your tax debt when the delay period ends. Remember, the ultimate goal is to eventually pay off your tax obligation, even if you can't do so right now.
How to Avoid Future Tax Debt: Proactive Steps to Take
Taking measures to avoid future tax debt is just as important as settling with the IRS over current tax debt. Here’s what you can do:
Update your W-4 Form: If you're a W-2 employee, update your W-4 form with your employer regularly to ensure enough taxes are withheld from your paycheck each pay period.
Pay your quarterly estimated taxes: If you're self-employed or have other income not subject to withholding, ensure you are paying your quarterly estimated taxes. The IRS doesn't expect perfection with your estimated taxes, but by breaking down what you owe in taxes quarterly, you can potentially avoid a large tax bill at the end of the year.
Create a savings account for extra security: Even after adjusting withholdings or paying quarterly taxes, consider setting aside additional money for tax bills in a separate account. This can provide extra security if you're unsure whether you've covered your full tax obligation.
The Role of Communication with the IRS: What to Expect
Open and proactive communication with the IRS can significantly impact resolving your tax issues. Here's what you need to know:
Be proactive: Don't wait for the IRS to contact you. Reaching out early shows your commitment to resolving the situation and can lead to more favorable outcomes.
Keep the IRS informed: Once you've established a payment plan or settlement, you must update the IRS about any significant changes in your financial situation. This transparency can help you avoid potential complications down the line.
Use available resources:
Online resources through the official IRS website
Phone support at 1-800-829-1040
Document your communications: Keep records of all your interactions with the IRS, including dates, times, and the names of any representatives you speak with.
Be honest and accurate: Provide truthful and precise information about your financial situation. Inaccuracies, whether intentional or not, can lead to serious consequences.
Common Pitfalls to Avoid When Settling with the IRS
Even though settling with the IRS yourself is easier than ever, there are still a few common pitfalls you should avoid:
Inaccurate Financial Information
When you submit forms to the IRS, ensure you provide complete and accurate financial information. The IRS can access much of your financial data, so any discrepancies may cause serious consequences, such as delaying your settlement.
Ignoring the Problem
It might be tempting to forget about your tax debt, but this approach will only make things worse. Penalties and interest continue accumulating regardless of whether you're actively addressing the issue. Working with the IRS is crucial to find a manageable solution as soon as possible.
Missing Payments
If you've entered into an installment agreement or OIC with the IRS, paying your bills on time is essential. Missing a payment or being late can nullify your entire settlement. Set up reminders or automatic payments to ensure you never miss a due date.
Knowing When to Seek Professional Help: Signs You Need Assistance
While many people can successfully settle with the IRS on their own, professional help becomes invaluable in some situations:
Uncertainty about the process: You're unsure how to proceed or which course of action is best for your situation. Tax laws and IRS procedures can be complex, and a professional can help you navigate these waters more confidently.
Complex tax debt: This could mean that you owe a large sum, your debt spans multiple tax years, or your financial situation involves intricate details that make settlement more challenging.
Facing IRS enforcement actions: You're dealing with serious IRS enforcement actions such as levies, liens, or wage garnishments. These situations often require immediate and expert attention to protect your assets and rights.
Limited time or resources: You don't have the time or resources to dedicate to understanding and managing the settlement process yourself. A tax professional can handle the details, saving you time and stress.
Previous failed attempts: You've tried to settle with the IRS before and were unsuccessful. A professional may be able to identify why previous attempts failed and develop a more effective strategy.
Summary
If you owe money to the IRS, settling your tax debt is possible. Before proceeding, it's crucial to understand your tax situation, explore available settlement options, and determine which ones you qualify for. Throughout the process, maintain open communication with the IRS. While many can resolve tax issues independently, recognize when professional help may be necessary. With the right approach, you can successfully navigate IRS settlements and regain financial stability.
