Do you owe back taxes? Have you received payment demands or other worrying letters from the Internal Revenue Service (IRS)? Owing money to the IRS can be scary and confusing, but luckily, you have options. Here is a look at just five of the potential routes you may be able to take with your tax debt.
1. Short-Term Payment Plan
The IRS’s short-term payment plan is for people who can pay their tax debt within 120 days. If you work as a contractor or any other business where you get large payments followed by relatively long periods of not bringing in revenue, this option may be ideal for you.
To explain, imagine you file your tax return on April 15. You owe $5,000, but you don’t have any cash available to pay. However, you have recently taken on a new client and you anticipate getting a $10,000 payment in mid-June. That payment is probably enough to cover your operating expenses and living costs, and you are likely to have $5,000 left over to cover your tax debt. In this situation, the short-term payment plan may be ideal for you.
2. Long-Term Payment Plan
Many people simply don’t have the ability to come up with a large payment 120 days or less after filing their taxes. However, they have a little bit of extra money every month that they can spare. If you’re in this boat, you may want to look into the long-term payment plan.
With this option, you can take up to ten years to repay your tax debt, but you may have to set up automatic payments to secure your arrangement. To estimate your payment, divide your tax debt by the number of months you want to make payments, but keep in mind that your actual payment may be slightly higher because interest will continue to accrue on your tax debt while you make payments.
3. Offer in Compromise
With an offer in compromise, you make the IRS an offer, and the agency compromises by letting you pay less than you owe. For example, you may owe $10,000, but the IRS agrees to let you settle the debt for $7,000. The remaining $3,000 basically disappears.
To qualify for this option, you have to give the IRS detailed information about your financial situation, and to increase the likelihood of having your offer accepted, you may want to work with a tax debt specialist who understands how to submit financial disclosures to the IRS.
4. Currently Not Collectible
If you can’t afford to make monthly payments or do an offer in compromise, you may want to ask the IRS to mark your account as currently not collectible (CNC). When you qualify for CNC or hardship status, the IRS suspends all collection activity on your account. You don’t have to worry about the agency garnishing your wages, levying your assets, or taking any other collection activities.
This option also requires a full financial disclosure, so you may want to work with a professional.
Unfortunately, even if you get CNC status, you may eventually have to repay your tax debt. The IRS assesses these accounts every few years, and if your financial situation changes, you may be required to start making payments.
To permanently erase your tax debt, you may want to discharge your tax debt through bankruptcy. The tax debt needs to be income tax that is at least three years old.
You also must have filed your tax return at least two years ago, and you can’t have committed fraud or tax evasion. In other words, if you filed a return for four-year-old taxes last year, you don’t likely qualify to discharge that debt through bankruptcy for another two years, even though the debt is over three years old.
At Wiesner & Frackowiak, LC, we know how difficult consumer and tax debt can be. We help clients with back taxes, credit card debt, medical debt, foreclosure, and more. Need guidance? Tired of financial stress and calls from bill collectors? Then contact us today.