Taxes aren’t exactly a fun part of life, and they certainly aren’t optional. If left unpaid, your tax bill can balloon and cause a huge financial headache, one that might be difficult to get rid of. But what many people don’t know is that they have options when it comes to dealing with their tax debt. Here’s how to settle IRS debt by yourself.
What happens if I don’t pay my taxes on time?
If you don’t pay your taxes when you file, you’ll receive a bill for the unpaid balance. The unpaid balance is subject to interest as well as a monthly late payment penalty. But that doesn’t mean you shouldn’t file if you don’t have the money to pay all your taxes. The IRS also charges a failure-to-file fee that is equal to 5% of the unpaid balance per month, which can accrue to as much as 25% of unpaid tax. If you aren’t going to pay your whole bill at the time of filing, you should immediately get in touch with the IRS to figure out a plan.
Your tax bill has an expiration date, but it’s not short. The IRS has 10 years to collect taxes, penalties and interest from you.
How can I settle my IRS debt for less than I owe?
It’s not easy, but it is possible to pay less than you actually owe. The federal government considers an offer in compromise (OIC) a last resort if you can’t pay what you owe in taxes. The qualifications are fairly murky, though. Generally, the IRS might let you pay less than you owe if they think that’s the most money they can expect to collect from you in a reasonable period of time. That time is likely the full 10 years they have to collect on the debt.
How do I know if I qualify for an offer in compromise?
The IRS will consider a variety of factors when deciding to accept an application for an offer in compromise, including your ability to pay, your income, your expenses and your asset equity. To find out if you qualify, you can fill out an online questionnaire. Filing all your relevant tax returns is one requirement to be considered. Another is making your estimated tax payments, if applicable. You are also ineligible if you are currently in a bankruptcy proceeding.
If you are approved for an offer in compromise, there are two ways to pay your settled tax bill: a lump-sum cash payment and periodic payments. In a lump-sum cash settlement, you submit the initial payment of 20% of your total offer with the application. If the offer is accepted, the remaining balance must be paid in five or fewer payments. With the periodic payment option, you submit the initial payment with your application and continue to pay down the balance in monthly installments if the IRS accepts the offer.
Note that your application for an offer in compromise includes a $186 nonrefundable application fee, but if you qualify for Low Income Certification, that fee is waived, along with the initial payment and any payments required while your offer is being considered. You can find more details about Low Income Certification here.
How much should I offer to settle my IRS debt?
Knowing what your settlement offer should be can be tricky and you might want to lean on an attorney or a service like Resolve during this process. The IRS’s Form 433-A also offers guidance on an appropriate offer, meaning one you can not only afford but that the government will find acceptable for recouping their money.
Ultimately, the government is looking for a number that to them equals the most money they could expect to get back in the 10 years they have to collect the taxes, penalties and interest. But the amount also has to be something you can afford. The IRS takes into consideration your bills and monthly expenses when determining how much you can pay. They won’t just take your word for it — they’ll do their own calculations once you’ve put in an offer. If you’ve made a low-ball offer on your IRS debt, you’ll have a chance to increase it if the IRS isn’t satisfied. If you don’t qualify for an offer in compromise, you can still ask to be put on an installment plan to pay off what you owe.
IRS payment plan options: What is an installment agreement or a temporary payment delay?
If you owe the government $50,000 or less in combined tax, penalties and interest, you may qualify for an installment agreement, also known as a long-term payment plan. And you’re guaranteed for an installment agreement if you meet certain criteria, such as owing less than $10,000 and agreeing to pay off your taxes in full within three years. Otherwise, you may have up to six years to pay what you owe. Keep in mind that you’ll still have to pay interest on the unpaid taxes and late penalties until you pay off your debt in full. So it makes sense not to drag things out.
You might be able to avoid paying penalties (but not interest) altogether if you meet the requirements for either penalty relief due to reasonable cause or the first time penalty abatement policy. Some reasons you might qualify for relief due to reasonable causes include a serious illness or death of an immediate family member,a fire or a natural disaster.
If you’ve hit on a temporary financial hardship and simply can’t afford to pay at the moment, the IRS can also delay collection on your account by marking it not collectible. This is a temporary delay until your financial condition improves. The debt does not go away, and your debt will actually increase due to the accrual of penalties and interest until you pay in full. The IRS says that it may also file a Notice of Federal Tax Lien to “protect the government’s interest in your assets.” This public document alerts your creditors that the government has a legal interest in your assets, including your personal property, real estate and other financial assets.
The best way to get rid of a lien is to pay your taxes in full, after which the IRS will lift the lien within 30 days. In the meantime, the lien will attach to all your existing and future assets until it’s lifted and will have a negative impact on your credit.
Will paying my taxes late affect my credit?
While failure to pay your taxes on time is generally not reported to credit bureaus, if you have a federal tax lien imposed by the IRS, that information will go on your credit report and you’ll see your score take a hit. However, if you’ve enrolled in an installment plan with the IRS, you can request that the lien be removed.
There are indirect effects on your credit to consider as well. Penalties and interest build up quickly the longer you take to pay your tax bill in full. This could mean that even making the monthly installment payment might put a squeeze on your budget and affect your ability to pay other bills on time, such as your car loan, credit cards or mortgage.
How Resolve can help
Navigating government forms and requirements can be tricky. An application for settling your IRS debt can be thrown out simply on a technicality like incorrectly filling out a form or omitting something in your proposal. Working with experts can be helpful. While the Resolve platform doesn’t deal with tax debt specifically, we assess each debt situation on a case-by-case basis to present your best options. That means we can put you in touch with tax experts or we can advise you on other debts that are affecting your ability to pay your tax bill.