How to Resolve IRS Tax Debt

If you pay estimated taxes, you may find yourself facing a tax debt when you come to fill in your tax return. As estimated tax payments are predominantly based on your income for the previous tax year, you can easily be crippled with a tax bill that is more than you anticipated if your income rises. If this happens to you, how can you cope with an unexpected tax bill that you probably won’t have budgeted for?

6 Tips To Help You Pay Off Your IRS Tax Debt

Don’t Postpone Your Tax Return

It’s tempting to hold off on sending your completed tax return so that you have more time to scrape together the cash to pay your tax debt. In reality, this is a bad move as it signals to the IRS that you are looking to evade paying your taxes. While this may be completely untrue, it’s best not to give the wrong impression as the IRS can choose to prosecute you if they feel that you are purposefully dodging tax payments.

Don’t Bury Your Head In The Sand

Getting in touch with the IRS might seem like a scary prospect, but it’s a necessary step if you’re having problems paying your tax debt. Once they are aware of your situation, they can offer advice on the repayment options that are available to you. After all, their main priority is receiving the money that you owe them! That said, it can be difficult to enter into negotiations if you don’t fully understand tax matters and this can result in you agreeing to repay more than you can afford to. To reduce the risk of this happening, you may want to think about hiring a tax professional who will offer a free consultation on how best to set about negotiating with the IRS.

Prioritize Tax Debt Versus Other Debts

A tax debt should be considered a bigger priority than any other debts that you may have. If you usually throw more than the minimum payment at credit cards or loans, try stepping down to the minimum payments until you’ve paid off your tax debt. It may not put you in the best position, but the IRS will expect you to pay back your debts to them before you pay back your debts to other creditors.

Consider Your Payment Options

Unless you don’t have any alternative options, avoid taking out a loan to pay off tax debts. Most loans are coupled with extortionate interest rates that will result in you paying back a good deal more than you owe to the IRS. Using a credit card to pay off the tax debt in one go can be a better option, but make sure that you have the means to pay this off at a later date or you can quickly become saddled with high interest fees there too. If your tax debt isn’t too high (for example, if it’s less than $1,000), you may want to consider borrowing money from friends or family. In most cases, you won’t be charged ridiculously high interest charges on top of the original loan and the repayment terms can be much less stringent.

Streamlined Installment Plans

This option allows you to spread your tax debt across five years (plus interest) as long as your overall tax debt does not surpass $25,000. If you think that this applies to you, you can submit an Installment Agreement Request Form (Form 9465), which the IRS will use to determine whether you are eligible. Alternatively, you can apply online via the “I Need To…” section of the IRS website  and selecting the “Set Up a Payment Plan” option.

If you are approved for a streamlined installment plan, it won’t come free. Successful applications are subject to a fee of $102 if you intend to pay by check, money order or credit card, but this falls to $52 if you opt for the convenience of monthly direct debit payments. This option does not automatically exempt you from late charges and interest, so this is worth bearing in mind if you anticipate struggling to cover these.

Generally speaking, the IRS are likely to approve your application if you meet the following requirements:

  • You have previously filed your tax returns on time and paid all income tax that was due
  • Your tax debt does not exceed $10,000
  • The IRS deems that you cannot repay your tax in full by the deadline
  • You agree to repay the tax debt within three years for a guaranteed streamlined installment plan, or five years for a streamlined installment

In Compromise Agreements

If you are experiencing severe financial difficulties and have no real means of paying your tax debt, you can fill in an Offer in Compromise Form (Form 656). Not everyone will be eligible, as you have to be able to prove that you are in financial difficulty to be approved. The ‘compromise’ aspect of the agreement involves offering either a lump sum or a series of fixed payments based on how much you can afford to offer. It’s not uncommon for successful applicants to take a loan from friends or family members so that they can put forward a lump sum to reduce future interest payments.

Whichever payment offer you request, there are certain conditions attached. For example, offering a fixed lump sum means that the rest of the tax debt must be paid in a maximum of five further installments, with the lump sum being sent with the form. Requesting the short term periodic payment option requires the full amount to be paid within 24 months of your offer being received by the IRS, and your first payment must be sent with the form. Typically, each payment should be made on the same day each month. Requesting the deferred periodic payment option does not set a deadline for your due tax to be repaid, but it does require regular monthly payments to be made. As with the previous option, your first payment must be sent with the form.

About the Author

By , on Nov 22, 2009
Sally Acquire is a freelance writer on topics relating to personal finance. She wrote this article for Tax Matters Solutions, a Fort Wayne financial services company that helps people with IRS problems, such as those due to unfiled tax returns.

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Leave Your Comment (5 Comments)

  1. ITS Guy says:

    Based on the circumstances, a taxpayer could qualify for an agreement to full pay within 60 or 120 days. The IRS is willing to offer these short term agreements to full pay in order to assist in tax debt repayment. Most of A taxpayer can request an agreement length depending on the specific situation.

  2. Any one in this position essentially failed to adequately plan during the tax year. The best way to avoid tax problems and owing the IRS, is to work with your CPA or tax professional on a regular basis to ensure that your estimated payments are sufficient to meet your tax obligation at the end of the year.

  3. Rick Vaughn says:

    I have to laugh because my friend is having this same issue with his latest tax return. He made a huge lump sum between estimated tax payments and he thought for sure he had put enough money aside.

    As with any debt I think “Keeping your head out of the sand” is the most critical aspect here. Make more money should be beneficial not a pain in the ass.

  4. kenyantykoon says:

    another reason that people postpone sending their tax returns it to look for more tax deductions and tax credits due to them. This is normally very hard to scrape together alone so the option is normally a tax professional to go this for you because in the long run you save a lot of cash

  5. Johanne says:

    Excellent tips. Even Nicholas Cage can take something useful from this post.

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