Are you facing a tax bill you can’t afford to pay? Although the IRS does not offer a debt forgiveness program per se, other alternatives may help you pay the taxes you owe.
Read on to learn more about what happens if you owe tax debt, how to find relief and why you may want to consider hiring a tax relief firm.
What Happens If You Owe Tax Debt?
If you owe tax debt but can’t pay the balance when you file, the IRS will send you a tax bill in the mail. It will include the total amount owed and a breakdown of the federal income tax, interest, and penalties accrued to date.
The outstanding balance will continue to accrue interest until it is paid in full. You will also be subject to additional collection actions that could have harsh consequences for your finances.
Examples of IRS Collection Actions
Failure to resolve your tax debt with the IRS could result in one of the following collection actions:
Tax Lien
A Notice of Federal Tax Lien is a legal claim to your property by the IRS. It’s public record and can make it challenging to qualify for credit from lenders and creditors. Generally, the lien will remain intact until you repay the total amount owed or enter into an installment agreement.
The IRS could also withdraw the lien if it was filed incorrectly, or doing so is in the best interest of the federal government and will allow you to resolve your tax debt more quickly.
Tax Levy
The IRS may levy your assets and future federal and state tax refunds to resolve unpaid tax debt. These include bank accounts, vehicles, RVs, livestock, boats, and real property.
Wage Garnishment
A portion of your earnings could also be seized by the IRS to satisfy the unpaid tax debt. Wage garnishment calls for a percentage of your paycheck to be withheld and sent directly to the IRS as payment toward back taxes.
Does the IRS Have a Debt Forgiveness Program?
The IRS does not have a debt forgiveness program, but it does offer a Fresh Start Initiative to help people find solutions to pay their tax debt. If you owe a substantial amount of tax debt but don’t know what the best course of action is, consider consulting with a professional tax relief company to help you explore all your options.
In the meantime, read on about some of the options you have to pay off outstanding tax debt.
How to Pay Off IRS Debt
If you can’t pay your outstanding tax debt, don’t panic. Here are some relief options to consider.
IRS Fresh Start Program
The IRS Fresh Start Initiative (formerly known as the Fresh Start Program) is not a specific form of tax relief. Instead, it’s an initiative that specifies remedies to unpaid tax debts as noted in the tax code.
Relief options offered under the Fresh State Initiative are available to both individuals and small business owners. You can get more time to repay what you owe and possibly avoid sizable penalties and further collection actions.
Who qualifies for the IRS Fresh Start Program?
You could qualify for a program under the Fresh Start Initiative if you meet the following requirements:
- Agree to a direct payment installment forgiveness
- Earn less than $100,001 ($200,001 for joint taxpayers)
- Owe less than $50,000 at the time of application; (you could qualify for a federal tax lien removal if you owe less than $25,000)
- Be Current on federal tax filings
- Have the ability to pay the outstanding tax liability within 60 months
- Haven’t been delinquent on past payments to the IRS
The qualification criteria are slightly different for small business owners who owe back taxes.
They must:
- Verify a 25 percent drop in net income if you’re self-employed
- Incur a year-end tax liability under $50,000
- Owe less than $25,000 in business taxes at the time of application
- Current on federal tax filings and payments
- Can repay your outstanding tax liability within 34 months
- Haven’t been delinquent on past payments to the IRS
Offer in Compromise (OIC)
An offer in compromise (OIC) is an agreement between the taxpayer and IRS to settle the unpaid tax debt for a portion of the total amount owed (including interest and penalties). It’s only available to taxpayers who can prove they are experiencing financial hardship.
Installment Agreements
Do you owe less than $100,000 and can repay your tax bill within 180 days? You could qualify for a short-term payment plan. But suppose this option doesn’t work for you. In that case, the IRS also offers the following installment agreements to help you minimize tax penalties:
- Long-Term Payment Plan: Available to individuals who owe $50,000 or less in federal income tax and is offered as a 72-month installment agreement. If you’re a business that owes $25,000 or less in federal income tax, penalties, and interest combined, you could also qualify.
- Extended-Term Payment Plan: Available on a case-by-case basis, and the payment plan terms are determined by your income, liabilities, and any expenses the IRS deems allowable (according to the national standards of living). You will typically need a tax relief firm to negotiate this arrangement on your behalf.
Currently Not Collectible (CNC) Status
You could qualify for CNC Status if you’re experiencing financial challenges that make it impossible to afford tax payments. The IRS will review your request and decide if you are eligible for deferred tax payments until your financial situation improves.
FAQs About Debt Forgiveness and Debt Relief
Below are some frequently asked questions about debt forgiveness and debt relief:
The IRS has 10 years from the date taxes are assessed to collect payment from you. Once this period ends, the statute of limitations (SOL) expires, and the IRS must cease collection activity.
Please note that the SOL doesn’t officially start until the IRS sends you a bill or written notice of what you owe. This can occur if you file a return and fail to pay your tax liability or if the IRS files a substitute return for you.
It depends on the IRS’s Reasonable Collection Potential, determined by your income, expenses, assets, and projected future earnings. Refer to IRS Form 656 (Offer in Compromise) to compute a reasonable settlement offer.
It isn’t easy to get an OIC approved. To significantly increase your approval odds, consider hiring a tax relief company and allowing their tax resolution specialists to do the legwork for you.
