You owe the IRS. Now what?
No one wants to hear they owe taxes, but life happens. In fact, in 2020, over 11 million people collectively owed the IRS more than $125 billion in back taxes. If you find yourself in that number, it’s critical to know your options and how to exercise them.
First, act quickly
If you find out you owe back taxes, move quickly to contact the IRS. Fines and interest can rack up quickly. Those extra expenses can have a snowball effect and make matters worse. If you can pay your back taxes in full, do so. You can, however, dispute the bill if you think there is an error. So again, don’t hesitate. Contact your local IRS office immediately to set up an appointment and make your case. In a worst-case scenario, where you can’t dispute the taxes and the debt is too much to pay off immediately, you still have options.
Option 1: Payment plans
These come in two flavors, a regular payment plan and a partial payment plan.
Let’s go over the regular plan first. You must meet some prerequisites to qualify for this option. First, the entire bill for your income tax, penalties, and interest must be less than $50,000, and you must be up to speed on your tax returns. If you are self-employed, you must also be current on your estimated quarterly tax payments. Once these conditions are met, you can apply for a payment plan online. Setup fees are low, and you won’t have to provide additional financial information. If accepted, you have a chance to divide your debt into 72 monthly payments or less.
However, you can apply for a partial payment plan if you need more time. This option is based on what you can afford. You must meet all the qualifiers for the regular payment plan, but you cannot apply online. You’ll also have to provide information on your income, assets, and expenses.
Option 2: Offer in compromise
An offer in compromise might be an option if you can establish reasonable doubt about how much you owe the IRS. It might also be an option if you prove paying the full amount will create financial hardship. Either way, an offer in compromise keeps you from paying the total amount the IRS charged. Eligibility rules are extensive, but you can find them all here. Once an offer is made and accepted, you must stay current on all taxes for the next five years or risk losing the deal.
Option 3: Currently Not Collectible (CNC) Status
CNC status may be an option when all your income is needed to cover living expenses. The downside is interest and penalties are added each month, and any future tax refunds are applied to your debt. Also, the IRS can place a lien on some of your assets. The debt, however, becomes uncollectable after a certain time, usually 10 years.
Putting it all together
These are the three broad options available, but you can find the full range of options on the IRS website. Just remember, act quickly. If you need help, reach out to a CPA or tax professional who can guide you in the right direction and offer advice based on your circumstances. And remember, you aren’t alone. Resources are available to help you get out from underneath the debt.
By acting quickly, knowing your rights, and exercising your options, you can get out from underneath the debt with as little trouble as possible.