Easing Tax Burdens
The Internal Revenue Service (IRS) has some specific strategies laid out for tax debt relief. When you can’t afford to pay the full amount that you owe, the government works with you.
After all, if you can’t repay the full amount, they’ll often be willing to settle for at least some of that amount, as long as you work together.
Why Do You Need Tax Debt Relief?
If you’re having trouble paying taxes to the IRS, plenty of strategies and programs are available to you. If you’re currently low-income, struggling with medical debt due to chronic illness, struggling to get back on your feet after a major life event, or suffering extreme financial hardship, you might want to explore some of these options.
6 Tactics for Tax Debt Relief
1. Offer in Compromise
According to the Taxpayer Advocate Service (which is part of the IRS), the current acceptance rate for an Offer in Compromise is about 40%. However, due to its potential to drastically lower your total tax debt, it is one of the best strategies for tax debt relief.
An offer in compromise (OIC) is a program run by the Internal Revenue Service (IRS) in the United States. It allows taxpayers with unpaid tax debt to settle their obligations for less than the total amount owed. The IRS considers your complete financial situation, including income, expenses, and assets, to determine if they'll accept your offer.
Then, if you’re accepted, the IRS gives you two options for repayment:
- A lump sum within five months.
- A monthly payment plan over 24 months.
One of the biggest drawbacks to the Offer in Compromise is that the IRS regularly overestimates your ability to repay the debt, also called your “Reasonable Collection Potential." In a 2004 study, the “IRS determined reasonable collection potential was over 15 times the amount offered, but over 40 times the amount collected."
If you file for an Offer in Compromise, make sure to stress your inability to repay the full tax debt. It will increase your chances of receiving a settlement.
2. Installment Agreement
An IRS installment agreement, also known as a long-term payment plan, is an official way to repay your unpaid taxes to the IRS over time. It's a good option if you can't afford to pay your entire tax debt at once since it pauses all interest and penalties and avoids issues with you obtaining loans.
This option is only available to those who owe less than $50,000 in total debt. It costs $31 to set up online, and it’s easy to apply as long as you’re eligible.
3. Currently Not Collectible
Unfortunately, claiming that you’re “currently not collectible" is not a permanent strategy. It won’t wipe out your tax debt forever.
This is only a temporary solution where the IRS suspends collection efforts because you're currently unable to pay due to financial hardship. It doesn't erase your debt, but it provides temporary relief.
4. File for Bankruptcy
Both Chapter 7 and Chapter 13 bankruptcy state that income taxes may be eligible for discharge. However, this has some important caveats – and it’s usually not the full amount that’s forgiven. For Chapter 7:
- The income tax debt must be more than 3 years old.
- You must have filed all of your tax returns on time.
- Penalties and interest are not discharged.
For Chapter 13:
- Requires a court-approved repayment plan, which you must follow for at least 3 years from the date of filing before the remaining balance is discharged.
However, filing for bankruptcy puts a halt on IRS collection efforts. For people in serious financial trouble, it can be a fantastic option to get back on your feet.
5. Innocent Spouse Relief
Your husband or wife may have been hiding their unpaid taxes from you. After all, financial problems cause an estimated 20-40% of all divorces.
If that sounds like you, the IRS has a special program to help. To qualify, you must have filed a joint tax return with your spouse, your spouse must have underreported income to reduce your tax burden, and you were unaware of any of this behavior.
In that case, you’ll need to file Form 8857, "Request for Innocent Spouse Relief" with the IRS. This will relieve you of any additional taxes owed as a result of your spouse’s fraud. However, you’ll still be on the hook for the original tax amount.
6. Lump Sum Payment
Finally, a great way to reduce penalties and additional fees is to offer the IRS a full lump sum payment. Although it may require a significant amount of cash, it saves the IRS a lot of time and money attempting to recover what you owe. Under these circumstances, the IRS is willing to waive many of the fees associated with your tax debt.
What NOT To Do (Strategies for Tax Debt Relief)
1. IRS Fresh Start
Many articles on IRS tax debt relief strategies urge you to sign up for an advisor who will walk you through the “IRS Fresh Start" program.
In 2011, the IRS launched what they called a “Fresh Start" program. Since the name is catchy, it’s still around. Many advertisers and tax debt relief companies still urge their customers to sign up for the “IRS Fresh Start" program, but this has not been around for years. If you sign up with a company that promises to get you into the program, they’re misleading you.