If you’re one of the unlucky people who owe the Internal Revenue Service for back taxes, Uncle Sam gives you several ways to recover from this problem. The government wants to collect money -- not harass you. So negotiating with the IRS about what you’re able to pay is better than ignoring a tax debt. You typically have to prove your financial situation, but at least you can reach a resolution for recovery in order to move on with your life.
The IRS allows installment agreements so that you can pay your tax debt in small manageable amounts. These agreements normally last no longer than 60 months. Because interest and penalties are charged, you end up paying more when you take longer to pay. Acceptance by the IRS is guaranteed if your tax debt is less than $10,000 and you agree to monthly payments for fully paying what you owe within three years. Guaranteed acceptance is allowed for up to $25,000 if you agree to debit of monthly payments directly from your bank account. Negotiating an installment agreement is still possible if you owe more than $25,000 and submit to verification of your financial condition by the IRS.
Temporarily Not Collectible
The IRS occasionally puts a temporary hold on trying to collect your tax debt if you are in a bad financial situation. You have to prove that your financial hardship prevents you from paying any of the amount you owe. This process requires you to give the IRS a lot of information about your income and assets. IRS approval for status as “temporarily not collectible” doesn’t solve your tax problem, but it does buy you more time to obtain a solution later. The IRS follows up every few months to see if your financial situation has improved enough for you to start paying the tax debt.
Offer in Compromise
The Offer in Compromise program allows the IRS to forgive some of your tax debt by collecting a lower amount than what you owe. If accepted, you pay what you can afford and the rest of your tax debt is wiped out. The IRS will only accept an Offer in Compromise when no reasonable expectation exists for collecting more than your offer. Some offers are accepted because trying to collect the full amount owed would create a financial hardship. Although acceptance of an Offer in Compromise is rare, the IRS has expanded the number of people it is willing to help with this program. You must submit documentation requested by the IRS for an Offer in Compromise and you cannot be currently going through bankruptcy.
When no other options exist for resolving a tax debt, the IRS may agree to collect back taxes through your withholding allowance at your job. This is a way for the IRS to collect the amount you owe from your paychecks. The IRS issues a notice called a “lock-in-letter” to your employer. It specifies a marital status withholding rate and maximum number of withholding allowances that you are permitted. Your employer then adjusts your withholding according to the lock-in-letter. Money is removed from your paychecks and sent directly to the IRS.
Unfortunately, bankruptcy rarely results in wiping out tax debt. In most cases, better ways exist to resolve tax trouble. However, if you have problems with other debts in addition to back taxes, you might qualify for using Chapter 7 bankruptcy to recover from tax debt. Chapter 7 liquidates all your assets to pay the debts you owe. You must meet other conditions for the bankruptcy court to relieve you of having to pay back taxes. Using Chapter 13 bankruptcy normally results in paying tax debt with a payment plan.
- TaxDebtHelp.com: IRS Installment Agreement: Tax Answers, Form 9465, & Guidelines
- TaxDebtHelp.com: IRS Hardship: Getting Put on Uncollectible Status
- TaxDebtHelp.com: Offer in Compromise: Settling Taxes for a Fraction
- TaxDebtHelp.com: Offer in Compromise Requirements to Qualify
- IRS.gov: Form W-4 – Employee's Withholding Allowance Certificate
- TaxDebtHelp.com: 4 Options If You Can’t Pay Your Taxes
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.