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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. However, 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 are struggling to find a way to pay the IRS the money you owe this tax season, you may want to see if you qualify for any tax debt relief options. While there are programs available, you also should be careful to avoid scams

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 evaluate your options and make a plan well before your taxes are due on Tax Day, which typically falls on April 15.

Who is tax debt relief best for?

If you get hit with a financial hardship and are unable to pay your tax bill, tax debt relief may make sense. You can also benefit from it if you’ve dealt with a natural disaster like a hurricane or earthquake and are struggling to cover your tax payments. In addition, if your tax bill is unexpectedly high and you believe you can’t afford it, tax debt relief may be worth considering.

Tax debt relief programs and options

The IRS offers several tax debt relief programs for taxpayers who owe unpaid taxes including:

  • Installment Agreements (IA): With an IA, you may pay down your tax bill in multiple payments, usually within 72 months. This option is available if you owe less than $50,000 in tax, penalties, and interest.
  • Innocent Spouse Relief: If you were hit with tax fraud or errors you weren’t aware of, innocent spouse relief can help you. To qualify, you must file your taxes jointly and prove your innocence.
  • Offer in Compromise (OIC): You may qualify for OIC where you pay less than what you owe. This status may allow you to save a significant amount of money on your taxes.
  • Currently Not Collectible (CNC): If you can prove that paying your tax debt will prevent you from covering your basic living expenses, CNC can be an option. It gives you some time to figure out how to repay the IRS without worrying about collections activity.

Alternatives to tax debt relief

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

  • Use a credit card: Depending on your situation, you may save money by paying off your taxes with a credit card. This strategy also transfers your debt from the IRS to the credit card issuer, potentially giving you some peace of mind.
  • Take out a HELOC: A Home Equity Line of Credit or HELOC may be an option if you own a home with equity. Just make sure you can repay your balance so that you don’t risk losing your home.
  • Earn additional income: If you don’t have enough cash on hand to pay off your tax bill, think of ways to make more money. Sell unwanted items, pick up a side hustle or get a part-time job.
  • 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% early withdrawal penalty. If you go this route, you’ll have to pay yourself back with interest within five years.

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 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.

Watch out for these 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 that you’ve been scammed, file a complaint with the FTC.

Next steps

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.

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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.
Edited by
Loans Editor, Former Insurance Editor