Back in earlier times, if you didn’t pay your taxes you’d be sent to debtor’s prison until you or a kindhearted family member came forward to pay what you owed. Thankfully, those days are long gone. But people still face the problem of owing more in taxes than they can pay. CNN Money
detailed some options for settling your debts with the IRS if you find yourself in this position.
There are a few factors to weigh when determining what type of strategy to pursue when approaching the IRS with your proposal for repayment: how much you owe, how likely you are to be able to pay it, and how much financial information you’re willing to disclose.
The Easy Fixes
If the amount you owe is smaller or you’ll be able to pay in the not-too-distant future, your options are simpler. You could get a loan from a friend or family member, pay the IRS, and be done with it. You’ll still have to pay your people back, but paying the IRS immediately resolves the issue from their standpoint and stops the cycle of penalties and interest that accompany late payments. If you’ll be able to pay what you owe in 120 days or less, a short-term extension may also be an option. The goal with both of these shorter-term strategies is to keep the penalties and interest at a minimum.
The Harder Fixes
If you know it will take an extended period of time to settle a tax debt, more complex options exist.
- An Installment Agreement — An installment agreement is basically a payment plan you work out with the IRS. In order for an installment plan to work, you typically have to owe less than $50,000 and be able to pay off the debt within 72 months or in whatever time remains in the 10-year collection limitations statute, whichever comes first. Debts over $50,000 may qualify too, but things get more complicated.
- The Undue Hardship Extension — If you’re able to prove to the IRS that immediate payment of your debt would cause undue hardship like selling a valuable asset such as a home, you can request a undue hardship extension. If granted, you’ll have up to 18 months to pay your tax debt.
- The Offer in Compromise, or OIC — If you can document that you owe more than you could ever pay, an OIC can be filed. This is basically your offer to settle your tax debt for less than you owe.
The Undue Hardship Extension and the OIC are much less frequently used and less likely to be accepted by the IRS. And both require substantial financial documentation, so you’ll want to think of these as a last resort that may or may not be accepted.
When dealing with the IRS to settle outstanding tax debts it’s important to have a CPA or tax attorney to help you decide on the best option for your specific situation. It’s also important to be proactive, contacting your CPA or tax attorney immediately. Working with the IRS in a timely manner can make a big difference in the success of your effort to resolve your tax debt.