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

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

If you’re struggling to find a way to pay the IRS the money you owe this tax season, there are a few tax debt relief options you might qualify for. Here’s when you should consider it and how to spot a tax debt relief scam.

What happens if you stop paying your tax debt?

If you don’t pay your taxes, the IRS may charge a penalty of 0.5 percent of your unpaid taxes. You’ll be charged an additional 0.5 percent for each month you fail to pay, with a maximum of 25 percent. On top of that, you’ll be responsible for paying interest and additional penalties, which may be as high as 5 percent of the unpaid balance.

If you go long enough without paying your taxes, the government may also levy your bank accounts, garnish your wages or place a lien on your house. In addition, your creditworthiness may plummet, making it harder for you to qualify for credit or loans.

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 hefty bill, it’s better to evaluate your options and make a plan well before your taxes are due on Tax Day, which typically falls on April 15.

When is tax debt relief an option?

Tax debt relief is an option when you owe the IRS money and can’t afford to make the payment.

Before stressing about the thought of owing money, you’ll need to actually prepare and file your taxes. This not only ensures that you’re doing the right thing, but it’ll also quantify how much money you owe the IRS.

Once you have a firm number for the amount you owe, you’ll be able to explore relief and forgiveness options if you conclude that you lack the resources to pay. The sooner you complete your tax return, the more time you’ll have to solidify a plan. If you wait until Tax Day, you might have limited options to seek relief.

While there are a few ways the IRS can work with you on your tax debt, there are also some companies that can work on your behalf to help you settle your debt. Unfortunately, not every company has your best interest at heart.

Should you hire a tax debt relief firm?

The biggest benefit of a tax debt relief firm is that it takes a lot of the legwork out of negotiating relief. Legitimate tax relief companies hire experts in their field and have a good understanding of every option available, so it could be a good idea to consult one if you don’t have the time or energy to deal with the IRS yourself.

With that said, these firms can be expensive, charging a few hundred dollars or more in fees. It’s also a business that’s fraught with scammers promising to get you relief that you don’t qualify for. If you’re interested in a tax debt relief company, it’s critical to thoroughly vet any companies you contact and make sure to get any fees or caveats in writing.

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 doing so could put you in more danger than you realize.

One red flag is if a company demands payment before any 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 give you assistance.

Look for signs of a scam:

  • 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 that you’ve been scammed, file a complaint with the FTC.

IRS tax debt forgiveness programs

When you discover that it’s time to pay Uncle Sam but you don’t have the money, don’t panic. There are a few different options you have with the IRS for tackling your tax debt.

Installment agreement

You can complete an installment agreement when you complete your tax returns using Form 9465. In most circumstances, the IRS will approve your agreement request if you owe less than $10,000 and you’ve successfully filed your income tax returns in the last five years. However, if you owe $50,000 or less, you may be able to avoid filing Form 9465 and establish an installment agreement on the IRS website.

The IRS says that most installment agreements meet the criteria. This method allows you to make small monthly payments until your debt is paid in full. The maximum repayment term is six years. If you can pay the money within four months, you’re not a good candidate to apply for an installment agreement, and the IRS advises you to use the online payment system.

Offer in compromise

If you owe more than you know you can afford to pay and can prove that it’ll be detrimental to your finances, you might qualify for an offer in compromise (OIC). An OIC lets you settle your debt for less than you owe and is usually only an option if other payment choices have been exhausted.

The IRS determines if you’re eligible by checking your income, expenses, asset equity and ability to pay. If the IRS believes that you can pay the amount — in full or through an installment agreement — your OIC won’t be accepted.

The bottom line

While there are plenty of companies that might offer tax debt relief services, be cautious about handing over your cash. Instead, work directly with the IRS and inquire about payment plans or alternative methods for paying your tax bill, such as taking out a personal loan or using available credit you have. Just as you should deal directly with a creditor or lender about a loan or credit card payment, directly talk to the IRS about your tax bill.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
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