IRS Debt Settlement: What Are The Options to Settle Your Tax Debt?

Banks Editorial Team · September 5, 2019

IRS Debt Settlement: Tax debt can be one of the heaviest burdens for many Americans to bear. While you can guarantee that Uncle Sam will always get their share, there are ways to settle your debt with the Internal Revenue Service (IRS), often for less than the total amount owed. While it is never a good idea to get behind on tax payments, there are ways to reduce the obligation. When you can show that you haven’t paid the debt because of financial hardship rather than a desire to cheat the system, the IRS is more than willing to help. Knowing the different options that are available through IRS debt settlement is the first step to getting that knot out of your stomach.

 

 

IRS Debt Settlement

When it comes to collecting owed debts, the IRS would often rather settle for a lesser amount of money than spend the hours and dollars necessary to try to collect the full amount. Their process for settling debt is called an “Offer in Compromise.” According to the IRS website, they look at the following factors to determine eligibility for the Offer in Compromise:

  • Your income
  • Your ability to pay
  • Average expenses
  • The equity in your assets

When the IRS looks at these factors and you convince them that you can’t pay the full amount owed, the IRS will establish a reduced amount that you can pay all at once or in a few installment payments. There is some misinformation that IRS debt settlement will be for “pennies on the dollar.” This isn’t as easy or as common as it may seem.

The Offer in Compromise isn’t an option for those that have filed for bankruptcy. Also, if you’re accepted into this type of settlement option, there is a maximum of two years to get your debt paid. According to the IRS website, if you are eligible for a refund while in the middle of paying a debt to the IRS, that refund will automatically be used to pay down your debt.

Currently Not Collectible

According to the Taxpayer Advocate Service, when you are classified as “Currently Not Collectible” with the IRS, there is an admission that the taxes are owed. During this period, if you can demonstrate that you are not able to pay the debt due to current financial hardship, the IRS will put a hold on collection efforts. This is temporary, but in this period the IRS will not garnish your wages or put liens on your property. Keep in mind that you will continue to accrue interest and penalties. This does not lower your debt obligation, either, so it’s important to understand that this is only temporary relief.

Paying in Installments

Just like on a home or auto loan, you can make partial payments, or installments, on your tax debt. This is a very common way to handle paying your debt to the IRS. They will require you to have filed tax returns each year on time and have the ability to make the required monthly payments. The IRS always wants to get something rather than nothing, but they don’t want to waste the efforts of accepting monthly payments on people that are frequently late or in default on filing returns or making payments.
The IRS Installment Agreements page identifies some other requirements for installment agreements. For example, your payments as an individual must be made by direct debit if your debt is over $25,000. Also, business debt over $10,000 must be made by direct debit. Any questions about this process can be directed to qualified tax professionals, though you can set up an installment agreement with the IRS yourself.

 

 

Are You a Misled Spouse?

While individuals that file as part of a married couple can each be held responsible for tax debts, there are relief options through the IRS if a separated or recently divorced individual can prove that they were unaware of the tax irregularity. This has been a huge help to those that had no knowledge of what their partner was doing when it came to tax filing. Speaking with either an attorney or a qualified tax professional may be preferable to dealing with the IRS yourself, though that is certainly an option.

The Statute of Limitations

While there are ways for the IRS to get this waived, the general statute of limitations for the IRS to collect debts and any penalties is ten years according to section 5.1.19.1.1 on the IRS site. Contrary to popular belief, the employees of the IRS don’t find enjoyment from collecting tax debts. They will follow the letter of the law and will be very cordial in their communication with you.

Tax attorneys frequently use the statute of limitations to their advantage in tax cases. Many people try to “wait it out” and see if they can beat the statute of limitations. This is highly risky and can result in an even larger amount to owe to the IRS. Discussing this option with a tax attorney when discussing a possible IRS debt settlement is always advisable.

Bankruptcy

Bankruptcy is an option for writing off tax debt, but it doesn’t always work. Speaking with an attorney that specializes in bankruptcy law is technically not required, but it is highly advised. You need to know what the financial consequences of a bankruptcy are before you go through that process. A bankruptcy can make it very hard to borrow money for several years after your case has closed. You may be required to liquidate certain assets, and it will almost certainly harm your credit severely. Discussing all of these options with a financial advisor or a bankruptcy attorney should be your first step.

 

 

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