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4 Steps to Resolve Tax Debt with the IRS



No one likes knowing they’re in debt. It may mean calls, letters, and pressure from the people you owe. But it’s not rational to keep avoiding those calls and letters while hoping the debt gets wiped away somehow. The best approach is to face debt head-on and find ways to resolve the burden.

That applies to tax debt, too. And, according to a 2020 IRS survey, the majority of Americans agree they must pay what they owe. In the survey, participants said they believe it’s Americans’ civic duty to pay their fair share of taxes (94% agreed).

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1. Get assistance from a tax debt relief firm

Get assistance from a tax debt relief firm

It feels overwhelming to have tax debt hanging over you, especially when you don’t know what to do about it. That’s when you may want to consider working with a tax debt relief firm.

Before you hire the first tax relief specialist that pops up on page one of your search engine results, know what to look for to save yourself the stress of working with a scam artist.

Don’t work with any debt relief company that demands payment before they’ve done anything to actually assist you. Also, be sure to do your own homework about payment plans and whether you qualify for the IRS hardship program.

The reality is that very few actually qualify for that program and your best bet is to work with the IRS on a payment plan or an “Offer in Compromise,” discussed in the next section of this slideshow. Any promise a tax relief firm makes is probably a red flag.

That’s not to say there aren’t companies out there who can help you. You just may be better off working with your own tax preparer and reaching out to the IRS directly.

2. Request a settlement amount as part of an Offer in Compromise

Request a settlement amount

While it may seem like an adversary, the IRS is actually willing to work with you and offers many options. One of these options is called an Offer in Compromise (OIC). It’s usually tougher to qualify for this arrangement than a payment plan, which the agency also offers (more on that in the next slides).

An OIC is for people who owe more than they’re able to pay. You need to show that paying off all your tax debt would be detrimental to your finances and personal situation. If you can prove that to the IRS, then there’s an opportunity to settle your debt for less than what you originally owed.

If, after looking at your income, asset equity, and expenses, the IRS determines you can pay the whole amount, you’ll have to do so through one of its installment plans.

3. Agree to a payment plan

Agree to a payment plan

If you have a smaller tax debt, under $50,000, the IRS offers other payment plans, including installment agreements. You can take on one of these if you’ve filed tax returns for the last five years.

The agency offers what it calls a streamlined installment plan for amounts of $30,000 or less. For the streamlined plan, the IRS won’t require information about your current financial situation. There are also fewer forms to fill out with this plan. It also gives you six years to pay back the tax debt.

If you owe $10,000 or less in taxes, the IRS offers a guaranteed installment agreement that gives you three years to pay back what you owe.

When you and the IRS agree to the terms, you’ll be required to make the stated minimum monthly payment. If you can, make larger payments when possible, so you can free yourself from the debt sooner.

If you can’t make the minimum payment, then you’ll have to contact the IRS and agree to a different payment plan. However, you’ll also have to provide them with more information about your financial situation.

For example, you may need to show the agency what assets you can sell to pay your tax debt or if you have available credit to use as payment. IRS agents will also want details about how much money you have leftover each month after paying for necessary expenses like groceries, utilities, transportation, etc.

Unless you want IRS scrutiny, it’s better to be proactive about paying rather than claiming you have no available funds.

4. Pay attention to the expiration of the Statute of Limitations

Another step to resolve tax debt with the IRS is a little riskier. You can gamble and try to avoid payment until the statute of limitations runs out on the tax debt. That statute of limitations is 10 years.

The 10 years begins on the date of the tax assessment (when you actually filed the taxes that incurred the debt) and runs until the collection statute expiration date (CSED) a decade later. To get your assessment date, you can request a tax account transcript from the IRS. You can order the transcript online or file Form 4506-T.

There are some circumstances however that can also extend the time the IRS has to collect that tax debt past those 10 years. An Offer in Compromise suspends the statute of limitations during the time the OIC is pending, for 30 days after its rejection, or while an appeal is pending. Other reasons that the statute of limitations can be extended include bankruptcy or a request for a Collection Due Process hearing.

If your CSED has expired, then the IRS cannot collect the tax debt for that year any longer. Any tax liens that the IRS placed on your property can be removed. You can also notify the three major credit reporting agencies that you no longer owe that tax debt.

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