When will I stop owing taxes? This would be a great question to answer with a hard and fast rule. The truth is there isn’t one, as even if you don’t owe the government at the moment, something you do in the future could change that.
When you do owe taxes and cannot pay them back, it creates tax debt. This can feel like impossible stress, leading many taxpayers to wonder about their options for relief.
Let’s look at what you should do for relief from tax debt.
File Your Taxes
Filing taxes is one of the most important steps when dealing with tax debt. The government may charge you additional penalties and interest if you owe the IRS money and don’t file your return. Ensure you file all your overdue returns, even if you can’t pay in full.
Here are options for relief from tax debt, even if you cannot make a full payment. Depending on your circumstances, you may be able to make monthly payments or settle your debt for less than what you owe.
Lastly, paying what you owe upfront can avoid interest and penalties that would otherwise be applied. Also, be sure to file your taxes accurately to prevent additional penalties and interest from accruing.
Installment Plans
When it comes to relief from tax debt, one of the most sought-after options is an installment plan. Installment plans break up your total tax debt into smaller, more manageable monthly payments.
Depending on your filing status and total tax debt amount, these plans can last three to six years. You can even qualify for an extended installment plan lasting up to seventy-two months.
The amount of the payments will depend on the amount of debt the taxpayer is responsible for and their current ability to pay. These payment plans can be set up with no additional fees in addition to the unpaid taxes. However, any payments not kept up or late payments may result in a penalty fee.
To qualify for an installment plan, complete a form and provide proof of your income and expenses. This allows the IRS to determine a monthly payment amount that works for you and the government. Installment plans relieve taxpayers from the more considerable lump sum of debt and make it much more manageable.
Use a Credit Card to Pay Your Taxes
Credit Card payment of taxes can provide much-needed relief. Credit card payment of taxes can help taxpayers avoid IRS penalties and interest, as well as potential bank accounts and asset seizures. Though this option is available for tax debt, taxpayers must understand the risks.
Credit cardholders who don’t have enough funds to pay off the tax debt immediately will be subjected to interest, which can add up with time as the credit card balance grows. Also, the claim can rise even higher if the credit card balance is placed toward a balance transfer fee. Therefore, credit card payment of taxes can become a very costly relief.
Home Equity Loan
The home equity loan is one of the options available to relieve tax debt. This type of loan allows you to borrow money against your home’s equity to pay off your debt.
You can get up to eighty percent of your home’s value in cash. The advantage of this option is that you can keep your house out of foreclosure and get the needed financing.
Furthermore, the interest rates and repayment terms are usually more favorable than other loan options. Home equity loans offer a way to relieve tax debt without causing financial hardship and should be considered when deciding on a repayment plan. However, it is essential to bear the risks and responsibilities of taking out a loan and analyze if it’s the right option for you.
Home equity loans generally have lower interest rates than other loans, and the interest is tax-deductible. However, this type of loan should be taken cautiously, as it puts the borrower’s home at risk if they cannot repay it. Borrowers should carefully consider the risks and benefits of a home equity loan when determining if it is the best option for relief from their tax debt.
Get Personal Loans
One of the options for relief from tax debt is to get personal loans. Personal loans are loans from a bank or other lender, often in installments. The loan amount can be used to pay back taxes you owe, allowing you to get back on your feet financially.
Personal loans have a fixed interest rate, typically seven to thirty-six percent. Repayment terms will vary depending on the lender, but these loans are usually paid back over one to five years. It’s essential to consider the fees associated with the loan and ensure you can afford to keep up with the payments.
Getting personal loans could be risky if not managed carefully and could end up causing more financial problems than it resolves. Your credit score will be negatively affected if you cannot make timely payments. Furthermore, filing for bankruptcy could relieve tax debt if the individual meets the requirements.
Offer in Compromise
One option for relief from tax debt is an offer in compromise (OIC). This agreement between a taxpayer and the IRS resolves the taxpayer’s tax debt for less than the total amount due. To qualify for an OIC, the taxpayer must meet specific criteria and demonstrate that they can pay or that collection of the total amount during the timeframe set by the IRS would cause financial hardship.
When submitting an OIC, taxpayers must provide financial documentation to assess the taxpayer’s ability to pay and determine the offer amount. In addition, the taxpayer must make payment of the estimated offer amount to submit the OIC. Once the OIC is accepted, the tax debt is resolved, and the outstanding balance is waived.
Penalty Abatement
Penalty abatement is one of the options available to individuals struggling with tax debt. It involves having the IRS consider a taxpayer’s particular circumstances and waive all or part of the penalties they’ve incurred due to their tax debt. It is essential to understand that penalty abatement does not eliminate tax debt; taxpayers must still pay the amount due.
To qualify for penalty abatement, taxpayers must be able to prove that their failure to pay taxes on time was due to an IRS error, “reasonable cause,” a death in the family, a natural disaster, or another extenuating circumstance. Taxpayers should provide as much documentation and information as possible when requesting a penalty abatement.
Some other options for relief from tax debt include payment plans, filing an offer in compromise, or debt collection suspension. Each option comes with qualifications and should be discussed with a tax professional.
Innocent Spouse Relief
Innocent spouse relief is one of the options for relief from tax debt. This applies to individuals who file joint tax returns with their spouses or former spouses. They are now financially disadvantaged due to their partner’s false information or failure to pay the tax due on their return.
Innocent spouse relief may completely absolve the taxpayer of any tax, interest, or penalty related to their underreporting of income. The requirements for the relief are that the taxpayer must not have known or have had no reason to know of the errors on the return and that it must be determined that it is fairer to hold the taxpayer harmless than to hold them responsible for the amount due. Innocent spouse relief does not consider divorce or separation from the marital relationship after the tax debt was incurred.
The following are the qualifications that you need to meet:
- Filed Joint Return
- Understated Taxes
- Lives in a Community Proper State
File Back Taxes
One of the best options for relief from tax debt is to file back taxes. By filing previous taxes, individuals can often decrease or eliminate any penalties or interest that may be accrued and reduce any principal amount owed. It is also important to note that filing back taxes can correct any inaccurate information previously reported, perhaps due to an oversight on the taxpayer’s part.
It is also essential to pay any amounts due as soon as possible to avoid further penalties or interest and establish a history of paying taxes on time. Alternatively, the taxpayer might qualify for a payment plan with the IRS to make payments over time.
In addition, it is possible to settle the debt with the IRS through an Offer in Compromise, allowing the taxpayer to pay a smaller amount than the total amount owed. Finally, a bankruptcy appeal is an option for individuals who cannot pay their debt. However, it is essential to note that it can have significant consequences, such as losing assets and the ability to conduct business activities.
Currently-not-Collectible Status
Not collectible status (CNC) is an option for relief from tax debt. This means that your creditor, the IRS, has acknowledged that you do not have the financial resources to pay and has agreed to suspend collection activity for some time. To learn more and know how to qualify for CNC, you must demonstrate that your living expenses exceed your income, so it’s essential to establish and track income and expenses as best you can.
Once approved, the IRS will not try to collect the debt while you remain in CNC status except to review your financial situation each year. CNC is a great option if you cannot pay your tax debt off shortly. However, it is essential to understand that it does not make the tax debt disappear; it merely postpones collection attempts until your financial situation changes, and you can pay.
There is also a downside of CNC that you need to consider and think of before using this to pay your taxes:
- Interest Rates
- Late Payment Penalties
Getting Professional Help
Getting professional help from a tax relief agency or expert is one of the best options for relief from tax debt. A professional can help you determine what kind of relief you qualify for. They can review your financial situation and help determine your eligibility for IRS programs such as an Offer in Compromise, Installment Agreement, or Currently Not Collectible Status.
Professionals, such as certified public accountants (CPAs), have extensive knowledge of dealing with IRS debt and can help negotiate payment plans and other agreements by the necessary legal buildings. These individuals can further explain to you in further detail the specific steps and procedures needed to feel relief from this burden.
Moreover, consulting a tax attorney may be more suitable if you take distressing steps seriously. They are even more knowledgeable on IRS tax regulations and can provide solid guidance.
A professional could also investigate potential violations of your rights as a taxpayer and negotiate on your behalf with the IRS if required. Furthermore, a professional can help you make the best use of any tax deductions or credits and ensure you file your taxes correctly moving forward to avoid further complications.
Relief From Tax Debt
Tax debt can be overwhelming and stressful, but there are ways to get through it. Take control and research options available, such as an IRS payment plan, installment agreement, offer in compromise, and IRS Fresh Start Initiative. Find out which option works best for you.
Take the steps today to get started and find the relief from tax debt you deserve.
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