How to Get Out of Tax Debt

How to Get Out of Tax Debt

6 Tips for Paying off IRS Debt

Of any debt, tax debt is perhaps the most stressful. The IRS can be very aggressive in its collection efforts, and has strong, some may say extreme, powers that mere lenders don’t, such as placing a lien on your property (or even seizing it), garnishing your wages, or seizing money from your bank account, all without going to court first.

If you owe the IRS money, whether it’s a recent debt or one that’s years old, it’s time to figure out a way to settle up. Here are some options to consider:

  1. Tap Your Savings: If you have money stashed away to pay the bill, do it. If you have some money saved but not enough for the entire bill, read the sections on repayment plans and offers in compromise.
  2. Repayment Plan: You can ask the IRS for a repayment plan if you don’t currently have an installment agreement in place and you have filed all required Federal tax returns. You file Form 9645 and request an affordable payment plan. If the IRS approves your plan, you’ll pay a small fee plus interest.
  3. Charge Them: You can pay your taxes with a credit card at the website officialpayments.com. The service charges a fee plus you’ll pay interest on your credit card at the credit card companies’ rate. It may not always be the cheapest way to go, but it can be better than letting interest and penalties continue to accrue.
  4. Offer in Compromise: An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under certain circumstances. It’s considered a “last resort,” but the IRS may be willing to accept an offer in compromise if there is:
    1. Doubt that the assessed tax is correct.
    2. Doubt that you could ever pay the full amount of tax owed.
    3. Extenuating circumstances such as the collection of the tax would create an economic hardship or would be unfair and inequitable.

You don’t need a tax professional to prepare an Offer in Compromise, but it may be helpful depending on your circumstances.

  1. File Bankruptcy:  Bankruptcy generally does not wipe out tax debts, but there are situations where it can be used to eliminate older tax bills. Consult a bankruptcy attorney for advice. 
  2. Get Professional Help: If you have “fudged” things on your taxes, or have some questionable issues, hire a tax attorney to help you clean up the mess. CPA’s and enrolled agents may be called to testify against you in tax court, but your communications with tax attorneys are protected by attorney client privilege.

Find Income to Pay Your Taxes

The options I’ve described may all help you to lower your tax debt, but you still must find the income to pay them off.

There are several ways to do this:

  • Cut expenses. Start tracking where you spend your money and look for ways to cut back. It may not be fun, but think of it as temporary. One of the best ways to do this is to start paying attention to what you’re spending and see if you can find ways to cut even a little. Every extra dollar you free up can help you cut your debt faster. 
  • Bring in more income. One of the best ways to do this may be to have your own business. This may save you money in taxes and bring in extra cash, as well as other benefits. 

Plan for Next Year

Once you’ve created a plan to pay off your existing tax debt, now is a good time to start thinking about how you can permanently reduce your taxes in the future. My friend and Rich Dad Advisor, Tom Wheelwright has strategies to lower your taxes and to grow your wealth. All you have to do is take action.

If you need more help getting out of debt, read my book,ABCs of Getting Out of Debt: Turn Bad Debt into Good Debt and Bad Credit into Good Credit.

Original publish date: February 05, 2020