Of any debt, tax debt is perhaps the most stressful. The IRS can be very aggressive in its collection efforts, and has strong, some may say extreme, powers that mere lenders don’t, such as placing a lien on your property (or even seizing it), garnishing your wages, or seizing money from your bank account, all without going to court first. Tax liens are the only debt to remain on your credit report forever if they are not paid. If paid they still remain on your report for seven years from the date they are paid, though relatively new rules allow you to ask the IRS to remove a paid or satisfied tax lien from your credit report.
If you owe the IRS money, whether it’s a recent debt or one that’s years old, it’s time to figure out a way to settle up. Here are some options to consider:
Tap Your Savings: If you have money stashed away to pay the bill, do it. If you have some money saved but not enough for the entire bill, read the sections on repayment plans and offers in compromise.
Repayment Plan: You can ask the IRS for a repayment plan if you don’t currently have an installment agreement in place and you have filed all required Federal tax returns. You file Form 9645 and request an affordable payment plan. If the IRS approves your plan, you’ll pay a small fee plus interest. The interest rate is reasonable.
If your request is approved, you’ll be able to pay your taxes in monthly payments instead of immediately paying the amount in full. In return, you’ll need to make your monthly payments on time, and pay all your future tax liabilities. (That means you shouldn’t adjust your withholdings so high that you’ll end up with another tax bill you can’t pay.)
Charge Them: You can pay your taxes with a credit card at the website officialpayments.com. The service charges a fee plus you’ll pay interest on your credit card at the credit card companies’ rate. It may not always be the cheapest way to go, but it can be better than letting interest and penalties continue to accrue.
Offer in Compromise: An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under certain circumstances. It’s considered a “last resort,” but the IRS may be willing to accept an offer in compromise if there is:
- Doubt that the assessed tax is correct.
- Doubt that you could ever pay the full amount of tax owed.
- Extenuating circumstances such as the collection of the tax would create an economic hardship or would be unfair and inequitable.
You don’t need a tax professional to prepare an Offer in Compromise, but it may be helpful depending on your circumstances.
File Bankruptcy: Bankruptcy generally does not wipe out tax debts, but there are situations where it can be used to eliminate older tax bills. Consult a bankruptcy attorney for advice. Bankruptcy may eliminate other bills so you are able to pay off your tax debt and other essential bills.
Get Professional Help: If you have “fudged” things on your taxes, or have some questionable issues, hire a tax attorney to help you clean up the mess. CPA’s and enrolled agents may be called to testify against you in tax court, but your communications with tax attorneys are protected by attorney client privilege.
For more information on this or other debt related matters, please read my book, The ABCs of Getting Out of Debt.