Tax debt doesn’t go away on its own. There is a solution to every tax problem, but finding the right resolution for your situation requires a thorough understanding of your circumstances and a comprehensive look at potential solutions. These three steps are essential to resolving tax debt when you owe the IRS.
Step 1: File Your Taxes
You might be hesitant to file your taxes if you know you’re going to owe the IRS more than you can afford to pay. However, failing to file can actually make the situation worse. Filing your taxes is the first step to IRS debt resolution. By filing, even if you can’t pay right away, you can avoid some penalties. It also helps you and any tax professionals you work with understand exactly the situation you’re facing.
The sooner you address any unfiled tax returns, the sooner you can move on to step two and determine how best to resolve your tax debt.
Step 2: Know Your Options
It’s important to know that resolving tax debt doesn’t always mean you have to pay the IRS what you owe right away or even the full amount. There are many options for tackling tax debt. A tax resolution professional can help you decide which solution is best for you.
How do you resolve IRS debt? These are some common options, depending on your financial situation and other unique circumstances:
- Offer in Compromise: Depending on your assets, income, and living expenses, you may be able to negotiate with the IRS and settle your tax debt for less than what you owe.
- Installment Agreement: While you may not be able to pay off your back taxes in full, regular monthly payments over time would allow you to resolve your tax debt.
- Currently Not Collectible: If you’re unable to make any payments toward your IRS debt, you can pause collections until your financial hardship passes (or the statute of limitations expires).
- Penalty Abatement: In some cases, you may be able to reduce the amount you owe the IRS with a penalty abatement. Extenuating circumstances determine whether you qualify.
- Innocent Spouse Relief: Sometimes, tax debt in your name should not be your responsibility. Rather, you’re simply an innocent spouse unaware of any improprieties in a jointly filed return.
Step 3: Resolve Your IRS Debt
After deciding, with the help of a tax resolution professional, which strategy is right for you, you must act on it. If you fail to make progress toward resolving your tax debt, the IRS can and will take aggressive collective action. Eventually, you may experience a tax levy or lien.
In order to resolve your debt to the IRS for good, you must keep current on your payments from any agreement you reached with the IRS. It’s never a good idea to agree to a resolution you know you won’t be able to pay. Moving forward, you should also file and pay your taxes on time. Failing to pay toward your tax debt in the agreed-upon manner or letting new back taxes accrue can trigger collective action against you, and start the vicious cycle of penalties and interest anew.