Tax debt relief: How to resolve your debt with the IRS

Getting a tax refund might be one of the few times you’re happy about hearing from the government. However, this correspondence may not be as fun if you owe the IRS money, especially if you can’t afford to pay your tax bill.

If you are struggling to find a way to pay the IRS the money you owe this tax season, it’s always better to act sooner than later. See if you qualify for tax debt relief programs as soon as possible to avoid delinquent payments and keep an eye out for any potential scams on the way.

What is tax debt relief?

Tax debt relief is a way the government helps you when you can’t afford to pay your tax bill. This comes in the form of a payment plan or a settlement in which the IRS agrees to settle your tax debt for less than the full amount you owe.

If you owe money to the federal government and don’t think you can afford the bill, it’s better to plan ahead of Tax Day, which falls on April 15, 2024.

Who is tax debt relief best for?

Tax debt relief can be a good option if:

• You’re experiencing financial hardship due to unemployment, health issues or other pressing circumstances.
• You’re dealing with the financial aftermath of a natural disaster.
• You live paycheck to paycheck and can’t afford to pay your bill in full before Tax Day.

Tax debt relief programs

If you have unpaid taxes, consider the options below to make your payments more affordable while keeping your account current with the IRS.

Payment plans

Payment plans allow you to split your total amount due into smaller installments to make payments more affordable. The IRS offers two main payment plans to choose from:

• Short-term payment plan. This payment plan is available to taxpayers who owe no more than $100,000 to the IRS (including penalties and interest), and you’ll get up to 180 days to pay the balance in full.
• Long-term payment plan. This plan comes with a 72-month repayment period and is limited to taxpayers who owe less than $50,000 (including penalties and interest). With this plan, you’ll be making payments on a monthly basis. Direct debit is required on this option if your balance exceeds $25,000.

You can apply for either plan online, by mail, by phone or in person, and there’s no fee to enter into this payment arrangement. Once your application is approved, you can make a payment using a debit card, credit card, money order, check, online through Direct Pay or by phone through the Electronic Federal Tax Payment System (EFTPS).

Interest will continue to accrue on the principal balance regardless of your chosen plan until the amount is paid in full. Additionally, the long-term payment plan requires a one-time setup fee — something you can avoid by opting for the short-term payment plan.

The IRS’s long-term payment plan setup fee is assessed as follows:

• Non-direct debit payments: the setup fee is $130 if you apply online. For mail, in-person or phone applications, this fee comes down to a total of $225. If you’re a low income taxpayer, you may be eligible for a reduced setup fee of $43, which will be reimbursed when your balance is paid in full.
• Direct debit payments: if you choose automatic withdrawals from your checking account, the online setup fee is only $31. For mail, phone or in-person applications, the amount goes up to $107. Low-income taxpayers who choose this option aren’t required to pay this fee.
• Innocent Spouse Relief

To be eligible for this type of relief, the following must be true:

• You filed a joint tax return with your spouse.
• Your tax return contained errors due to underreporting, miscalculation or fraud.
• You didn’t know about the errors.
• You live in a community property state.

You can apply for Innocent Spouse Relief by sending Form 8857 and any supporting documents to the IRS. The request should be submitted within two years of the IRS’s initial collection attempt. Remember that it could take up to six months from receiving your request for the IRS to decide if you qualify.

Offer in Compromise request

The Offer in Compromise (OIC) option allows you to settle your tax bill for less than what you owe if you meet the following requirements:

• Have insufficient income and assets to repay during the statutory period (Doubt as to Collectibility).
• Are unable to pay or doing so as a result of an extenuating circumstance, and doing so would be inequitable, unfair or cause financial hardship (Exceptional Circumstances or Effective Tax Administration).
• Don’t owe what’s being assessed due to a tax examiner’s misinterpretation of the tax code (Doubt as to Liability).

You should also be current with all your tax filings, mandatory estimated payments for the current tax year and receipt of the bill(s) for which you plan to request an OIC. To qualify, you also can’t be actively involved in bankruptcy.

Be mindful that the denial rate is relatively high for OICs, so you may want professional help before moving forward with the application process. Or you can use the OIC pre-qualifier tool to determine your eligibility for a settlement.

To apply, you’ll need to complete and submit the following to the IRS:

• Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals and any additional documentation required per the instructions.
• Form 433-B (OIC) Collection Information Statement for Businesses and any additional documentation required per the instructions.
• Form 656 (Offer in Compromise) and any additional documentation required per the instructions.
• A $205 application fee can be waived if your request is based on Doubt as to Liability or if you qualify for the low-income exception.
• Currently not collectible status request

If you can prove that paying your tax debt will prevent you from covering your basic living expenses, you can submit a request to get your account classified as “currently not collectible” (CNC). This classification gives you time to figure out how to repay the IRS without worrying about collections activity.

You can apply for CNC status by contacting the IRS directly at the number on your tax notice or bill. The IRS may also require you to submit a Collection Information Statement (Form 433-A, Form 433-B or Form 433-F) and documentation to substantiate your claims.

It’s important to note that entering CNC status does not reduce or eliminate your tax liability. You will continue to owe, and your outstanding balance will increase as interest and penalties continue to be assessed.

Alternatives to tax debt relief

If you determine tax debt relief isn’t right for you, here are some alternatives to explore:

• Explore income-increasing opportunities: This is one of the safest solutions when dealing with tax debt, as you’re not risking your credit or finances by borrowing money. While the logistics may seem complicated — particularly if you have a full-time job — that’s not necessarily the case. Selling old furniture, clothes and other valuables or picking up a side hustle like dog walking or tutoring can help you earn a quick buck without a huge time commitment.
• Borrow from your 401(k): As long as you’re under 59 ½, borrowing from your 401(k) retirement account to repay your taxes won’t lead to a 10 percent early withdrawal penalty. However, this isn’t recommended as a first option. If you go this route, you’ll have to pay yourself back with interest within five years.
• Take out a personal loan: These loans are typically unsecured, meaning you don’t have to borrow money against an asset. That said, besides interest, many lenders charge an origination fee on these loans, which increases the cost of borrowing. You’ll also need good to excellent credit to qualify for the lowest rates. Otherwise, depending on the lender, your interest rate could be as much as 36 percent.
• Use a credit card: The IRS allows you to use your credit card to pay your taxes. Although this option can give you more time to pay off your balances, it’s worth noting that you’ll be charged a payment processing fee of up to 1.98 percent of the transaction. On top of that, you’ll be responsible for any interest charged to your account by your credit card issuer.
• Tap into your equity: Home equity loans or home equity lines of credit (HELOCs) may be an option if you have at least 20 percent equity in your home. This option may be best suited for those who owe a substantial amount in taxes since the process can be risky since you’re putting your house on the line as collateral.

How to determine if a tax debt relief firm is legitimate or a scam

If you’re looking for immediate help from a tax debt relief company to tackle your tax debt, it’s easy to enlist the help of the first internet search result you click on. But you need to be aware of scams and what to watch for.

One red flag is whether a company demands payment before work is done. Fraudulent tax debt relief companies tend to request an upfront payment and claim to get your tax debt erased when you enlist their help.

If a company tells you about an IRS hardship program you qualify for, you may want to do your own research. The Federal Trade Commission says that most taxpayers don’t qualify for these programs, and most companies are looking to take your money and run rather than assist you.

Scam warning signs

• Guaranteeing that your IRS debt will be reduced or eliminated.
• Not reviewing your financial situation.
• Promising debt forgiveness.
• Ignoring you after you’ve paid for services.
• Denying you help, saying that the IRS rejected your request or that you no longer qualify for help.

Before you sign up with a third-party company, especially one you aren’t sure about, the FTC recommends addressing your concerns directly with the IRS to settle your tax debt. If you believe you’ve been scammed, file a complaint with the FTC.

The bottom line

Owing taxes you can’t afford can be nerve-racking. The good news is the IRS offers a variety of tax debt relief options to help you out. If you don’t believe you’re a good candidate for tax debt relief, there are alternatives at your disposal. It may be wise to consult a tax professional to get their insight on the best solution for your unique situation.