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, 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.

Tax debt relief programs and options

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

Installment Agreements (IA)

An installment agreement (IA) gives you more time to pay your tax bill. There are two IAs to choose from:

Short-term payment plan

It is available to taxpayers who owe no more than $100,000 to the IRS (including penalties and interest), and you’ll get up to 120 days to pay the balance in full. You can apply 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 remit payment by debit card, credit card, money order, check, online (using the E-pay tool) or by phone through the IRS’s Electronic Federal Tax Payment System (EFTPS).

Long-term payment plan

If you owe less than $50,000 (including penalties and interest) and need more than 120 days to pay the outstanding balance, a long-term payment plan may be more suitable. It comes with a 72-month repayment period. You can opt to make monthly payments directly or through automatic debit withdrawals — the latter is mandatory if your balance exceeds $25,000.

The setup fee also depends on the payment method you select. For direct payments, which are made via money order, the Direct Pay portal or the EFTPS, the setup fee is $130 if you apply online or $225 for mail, in-person or phone applications. If you meet the criteria for a low-income taxpayer (with an adjusted gross income at or below 250 percent of the federal poverty level), you may be eligible for a reimbursable $43 setup fee. If you select automatic debit withdrawals, the online setup fee is only $31 and increases to $107 for mail, phone or in-person applications. You could also be eligible for a fee waiver if you’re a low-income taxpayer.

Both arrangements do not prevent you from accruing interest and late payment penalties. They will continue until the balance is paid in full.

Innocent Spouse Relief

If you were hit with tax fraud or errors you weren’t aware of, innocent spouse relief might be of some assistance to you.

You can apply for Innocent Spouse Relief by sending Form 8857, Request for Innocent Spouse Relief, and any supporting documents to the IRS. The request should be submitted within two years of the initial collection attempt by the IRS.

Keep in mind that it could take up to six months from receiving your request for the IRS to decide.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) allows you to pay less than what you owe to settle your tax debt. You have to prove that you:

• 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 would be inequitable, unfair or cause financial hardship (Exceptional Circumstances or Effective Tax Administration)
• Don’t owe what’s being assessed due to a misinterpretation of the tax code by a tax examiner (Doubt as to Liability)

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

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

Also, include the $205 application fee and your initial payment with the package, or you could submit it through the EFTPS.

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 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 found 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:

• 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 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. Make sure you can repay your balance so 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 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.

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.

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.

Learn more:

• Here’s how to get a tax deduction for charitable giving
• Estimated taxes: How they work and when to pay them
• How long should you keep IRS tax records?