Filing your tax return or going to the dentist.
We know we shouldn’t wait too long to do either, given the discomfort and penalties for holding off. In the case of taxes, finding relief can involve time consuming, mathlete-type fortitude in deciphering tables and running calculations after reviewing what we earned and spent during the year. What a drag for you and your business.
Although I will say sometimes I actually enjoy filing my taxes—especially when I’m getting a refund! Other times, though, as a freelancer, I find myself faced with a tax bill that’s kind of overwhelming. If you’re in that situation right now, don’t panic. You might have an ally in a tax debt relief program.
Does it Hurt A Lot?
Paying off what you owe in full may feel out of reach if you’re facing situations like these:
- Under-withheld and got a big tax bill
- Have been delinquent for a while but are just now facing up to it
- Qualified for student loan forgiveness only to find out you owe taxes on all that “forgiven” money
None are great positions to be in. Penalties and interest can quickly add up, unpaid debts may be sent to collections, and your credit score can take a serious hit. In extreme cases, the IRS can even place a lien on your home or other assets. Naturally, the IRS prioritizes collecting the full amount of taxes owed. However, the agency also understands that some individuals and businesses may genuinely struggle to meet their obligations.
Hence, tax debt relief can come into play. A tax debt relief plan doesn’t necessarily get you squared right away with the government, or your state and local revenue agencies. But it can let you tweak payment approaches as a way of getting caught up or, under limited circumstances, reduce or even forgive your tax debt.
Visit Our List of Best Tax Relief Services
How Do I Get There?
For the IRS to consider tax debt relief you have to be up to date on all your tax filings and not be involved in an open bankruptcy proceeding. The IRS has a “pre-qualifier” tool that lets you enter your financial information (including assets, income, and expenses) and suggests a preliminary proposal amount. Your other financial obligations, such as student loans and state and local taxes, are considered when the IRS calculates this number.
Simplify Your Debt, Simplify Your Life
If making a full upfront payment isn’t an option, consolidating your debts through a lower-interest loan might be a practical solution—even for your tax obligations. The IRS generally doesn’t object to this approach, as long as it helps you manage your finances more effectively. Before proceeding, ensure the loan’s interest rate is lower than what you’re paying on your tax debt. If it is, consolidating could simplify your finances while allowing you to settle your dues with the IRS more efficiently.
Bankruptcy, Geez
Just how dire is the situation? It can be very much so-–tax debt is a key reason people file for bankruptcy, statistics show. Still, only some kinds of tax debt can be included.
Income tax debt is dischargeable under Chapter 7 if…
- You filed your tax return at least two years before you filed for bankruptcy; and the tax return itself was due three years before you filed bankruptcy
- The tax return was not intentionally fraudulent
Property taxes due more than a year before you file bankruptcy may also be dischargeable.
Certain types of tax debt cannot be discharged through bankruptcy. You will still be responsible for Medicare taxes, employment taxes, and tax penalties incurred within the three years prior to filing, among others.
Start With a Free Consultation
Settle Tax Debt Yourself
Your best approach is likely picking up the phone and calling the IRS or your state government’s equivalent. You can even walk into your local IRS office and start dealing with your financial difficulties in person.
Before you do, you’ll want to have the best available picture of your finances. What are your assets? What are your expenses? Do you think a payment plan would be beneficial, or do you need something more serious?
If your situation is complicated, you may want a tax attorney to help you out. But if you’re like many of us, you can turn to an IRS representative and find out your options for settling your tax debt with as little extra cost as possible. Some people will employ debt consolidation or other forms of borrowing to pay in full, while others can see their debt forgiven.
Tax Trouble? Let Someone Else Handle It
Many individuals and businesses are drawn to the idea of hiring a private tax debt relief company, viewing it as an appealing shortcut to avoid the daunting and time-consuming task of dealing with the IRS directly. You've likely come across advertisements claiming that, for a fee far smaller than your tax debt, these companies can take the entire burden off your shoulders.
Be careful, though. The Federal Trade Commission and other consumer protection groups say handing over the work can be a very bad idea.
Many tax debt relief companies offer unnecessary services or are even flat-out fraudulent. You can end up paying one of these companies money you could otherwise put toward your back taxes; all the while receiving a service you could have provided yourself. Or, you might give thousands of dollars to a company that never files the proper paperwork and refuses to give you a refund.
If you’re seeking a tax debt relief expert, consider hiring a reputable local accountant. Take the time to understand their fees and refund policies upfront. Additionally, check their rating with the Better Business Bureau to ensure they have a strong reputation.
Visit Our List of Professional Services
The Road Taken Has the Same Destination
Whether you do it yourself or hire an outside firm, the approaches under the federal government’s debt relief program are basically the same. It’s really less of a program and more of a collection of options for people seeking tax debt relief. It amounts to a more flexible, forgiving set of rules.
The IRS makes its payment plan determinations by…
- Scrutinizing your finances to determine how much you can be expected to pay. The consideration is based on how much tax debt you have and how long your payment plan will last.
- The IRS won’t collect tax debt from you if doing so would cause a crisis in your finances, so it will decide what your minimum monthly spending is. This includes credit card minimum payments, student loan minimum payments, and bank fees, among other items that were previously left out.
Continuing On A Payment Plan
If you are facing an overwhelming tax bill as either an individual or a small business; your first step should be considering if the payment plan would help you. Sometimes it’s enough just to break down the bill into smaller installments. You can even apply online under most circumstances.
There are two kinds of installment plans you can apply for.
- A short-term payment plan if you can pay in 120 days or less and owe less than $100,000, including penalties and interest.
- A long-term payment plan if you owe $50,000 or less. Approval of payment plans is usually simple, unless you owe an astronomical amount. If at all possible, set up auto debit so there’s no possibility of not making your payments on time.
‘My Spouse Did It!'
Sometimes, it’s not even your fault you are in hot water. Many married couples file their taxes jointly, and the IRS typically considers both partners liable for any tax — plus applicable penalties, interest, and so on — that is due. But what if your spouse lied on the return, and you had no reason to know about it? Let’s say your wife or husband had under-the-table income from a side business you didn’t know she or he was engaged in. When the IRS finds out, it will want to collect taxes and penalties from you as well as her or him.
It is possible to obtain full or partial relief from this type of tax debt. If you can demonstrate that you were not at fault, your tax liability may be completely forgiven. Alternatively, you might at least be able to separate your own financial responsibility from that of your spouse.
If you believe you meet the criteria for this relief, it’s essential to consult with an experienced accountant—and potentially a divorce lawyer—to guide you through the process.
How to Delay Collections on Tax Debt
If you’re experiencing temporary financial hardship, the IRS may be willing to delay putting your tax debt into collections.
You’ll need to speak to an IRS agent, fill out a form, provide proof of financial hardship; and accept that your tax debt will not go away as a result of this temporary delay. In fact, it will get bigger, because penalties and fees will accumulate the longer the process goes on. But if you are a small business or a self-employed person facing a very temporary cash flow issue; this option for is, especially advantageous for getting limited but immediate tax debt relief.
Start With a Free Consultation
Lets Meet In the Middle
If you have severe financial hardship, one of your best IRS tax debt relief options is called an offer in compromise (formerly known as the Fresh Start Program). It’s the closest thing to negotiating tax debt. This kind of relief is a little like what happens in bankruptcy; when creditors agree to accept less than they’re owed because they will at least get something. Based on your assets, income, and expenses, you make the IRS a reasonable offer and your tax debt may be settled in full.
Qualifying for an offer in compromise can be challenging, but certain circumstances may increase your chances. For instance, if you lose your job or experience a significant drop in business income, owe a substantial amount of money, and are unable to repay it, you might be eligible. Another scenario could involve becoming disabled, leading to a significant reduction in your income potential. However, you'll need to provide solid proof to support your case.
When you submit an offer in compromise, the IRS will evaluate your specific circumstances to decide whether your offer is acceptable—a process that can take up to two years. According to the IRS, an offer is generally considered acceptable if it reflects “the most we can expect to collect within a reasonable period of time.” While this criterion is somewhat vague, as each case is assessed individually, it underscores the importance of tailoring your offer to your unique financial situation. not going to give you a break just for the heck of it. They want to collect as much as they reasonably can.
If your offer in compromise is accepted, you can either pay in full or in installments.
What If I (Gulp) Die?
Not the most pleasant question, but one you might have to think about anyway: Can tax debt be inherited? Tax debt does remain after death, but fortunately your heirs won’t inherit the debt directly, so the IRS won’t ask them to personally pay it. Instead, your estate will need to make good on it or face the same kinds of penalties a living person would, including a lien.
In simple terms, this means that any outstanding tax debt must be resolved before your heirs can inherit proceeds from your estate. While the estate’s administrator might negotiate a settlement with the IRS, the more common scenario is that, unless your estate’s value is less than the tax debt owed, the full amount will need to be paid off before any remaining assets can be distributed to your heirs..
How to be eligible for IRS tax debt relief
To be eligible for this kind of IRS tax debt relief; you have to be up to date on all your tax filings and not be involved in an open bankruptcy proceeding. The IRS has a “pre-qualifier” tool that lets you enter your financial information (including assets, income, and expenses) and suggests a preliminary proposal amount. Your other financial obligations, such as student loans and state and local taxes, are considered when the IRS calculates this number.
If you submit an offer in compromise, the IRS will investigate your individual circumstances and determine if your offer is acceptable. (This might take as long as two years.) Generally, it’s acceptable “when the amount offered represents the most we can expect to collect within a reasonable period of time,” according to the IRS. That’s a little vague, because they consider each person’s circumstances individually; but what it tells you is that they’re not going to give you a break just for the heck of it. They want to collect as much as they reasonably can.
If your offer in compromise is accepted, you can either pay in full or in installments.
Start With a Free Consultation
How to Delay Collections on Tax Debt
If you’re experiencing temporary financial hardship, the IRS may be willing to delay putting your tax debt into collections.
You’ll need to speak to an IRS agent, fill out a form, provide proof of financial hardship and accept that your tax debt will not go away as a result of this temporary delay. In fact, it will get bigger because penalties and fees will accumulate the longer the process goes on. But if you are a small business or a self-employed person facing a very temporary cash flow issue; this option is especially advantageous for getting limited but immediate tax debt relief.
And I'm Done, When?
Generally, the IRS has 10 years to collect what you owe in taxes. If your tax debt is more than 10 years old, speak to an accountant about your situation. It’s important to understand that certain events, like filing for an “offer in compromise” can restart the 10-year clock, so you may not be in the clear even with old debts. That’s why it’s critical to speak to an expert who can help you understand your circumstances.
Ponying Up
If you’re finally ready to pay your tax debt — hopefully after some of it has been negotiated or forgiven — you should start at the IRS payments website.
The IRS has many options for paying tax debt, including the Electronic Federal Tax Payment System, wire transfers, check, or even cash.
A Final Thought
While the situation may seem challenging, it’s not without a silver lining. After all your hard work and payments, you’ll finally be in good standing with the IRS.
Rather than worrying about tax debt relief, you can shift your focus to planning how to spend your tax refund. And maybe even schedule that long-overdue dentist appointment!
Start With a Free Consultation
