How to Handle Tax Debt
by Jason Dean
When you owe money to the IRS, it can be pretty stressful. The IRS isn’t a good creditor to have. Unlike other companies that you might owe, a cell phone company or a credit card, the IRS doesn’t need to take you to court and ask for a judgment before they begin trying to collect. This means that with no more warning than a letter or a phone call, the IRS can garnish your wages, put a lien on your property, or even take money directly from your bank account. It’s not hard to tell that you should try to work with the IRS as soon as possible.
Setting Up an Installment Agreement
One of the most straightforward ways to eliminate your tax debt is to set up a payment plan with the IRS. Sit down with your tax professional and request Form 9465. Simply crunch the numbers with your tax professional and decide how much you can afford to pay each month. The IRS even lets you choose which day you’d like to have your payment due. If your tax debt totals less than $10,000 and your proposed monthly payment will get the debt paid off in full within three years, your installment agreement will be accepted automatically. If you can’t meet those terms, your tax professional can help you negotiate with the IRS to create a plan that they will accept.
In addition to choosing your monthly payment and your due date, you can also choose a wide variety of payment options, including having the payment automatically transferred from your bank account each month. The convenience of this plan leads many who owe the IRS to choose an installment agreement to get their debts paid.
Settling With an Offer in Compromise
An offer in compromise (OIC) is a lump sum settlement of less than you owe that the IRS agrees to take as payment in full. If you can afford a lump sum of money, but it’s only a portion of what you owe, you can try offering an OIC. If the IRS accepts your payment, you’ll have ended up settling for less than you’d end up paying with an installment agreement. Why would the IRS take less money? Well, they know that there is always a chance that you could just stop paying on your installment agreement. Then they’ll have the legal hassle of getting the money another way. If they accept your offer of a lump sum, they can consider the case closed.
You might hear about companies that offer to settle your debt with the IRS for “pennies on the dollar.” Well, the IRS isn’t as generous as these TV commercials make them sound. If you would like to consider making an OIC, visit a licensed tax professional and have them help you fill out Form 656. Your tax professional will be able to help you offer a settlement that is likely to get accepted by the IRS.
These are just the two most common paths that people take when they owe the IRS money. Each situation is different, so make sure to consult a tax adviser who can help you navigate the murky waters of the IRS. Keep in mind that the IRS will get the money one way or another. Have it be on your terms.