Tax Debt Relief: 8 Strategies That Provide Relief From IRS Debt
9 MIN READ
Published March 29, 2023 | Updated June 27, 2024
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Owing taxes to the IRS can be an intimidating experience and can result in tax liens on your valuable assets, and possibly even wage garnishment. The IRS collected over $98.4 billion in unpaid assessments on returns with additional tax due in fiscal year 2022. In addition, it collected $2.3 billion in delinquent returns.
A reputed debt relief company can use proven strategies to help you reduce tax debt, which may help you avoid bank account levies and wage garnishments. Tax debt relief can help you settle your tax debts, often for much less than what you originally owed. Read on to learn more about IRS debt relief programs and how they can help.
What Is Tax Debt Relief?
IRS tax debt relief refers to all the debt resolution programs available to help you alleviate the burden of back taxes. There are several ways you can resolve tax debt with the help of tax professionals, such as tax debt consolidation, settlement, or creating a payment plan. Your personalized IRS tax debt relief program can be one of these solutions or a combination of them.
8 Tax Debt Relief Strategies To Get You Out of Debt
Owing taxes to the IRS can be overwhelming, but there are a number of different IRS tax debt relief options available for you to choose from.
1. Tax Debt Consolidation
One of the most common tax resolution options is getting a personal loan that offers a reasonable interest rate. If you’re a credit union member with good credit (typically, a FICO score of 680+), you may be able to get an average APR of 10.78% on a personal loan.
Interest rates vary by financial institution, so it is important to compare the rates or work with a professional who can help you find cost-effective options. Once your loan is approved, you can use those funds to pay off the full amount of your income tax debt. Continue to make regular payments towards the personal loan to pay it off and resolve your debt at the earliest.
2. Installment Agreements
Just like loans, the IRS offers installment agreements that will allow you to pay fixed monthly payments for a predetermined term until your taxes, penalties, and interest are paid off.
Installment agreements do come with fees and charges, but they also offer a number of benefits:
- Affordable debt repayment by spreading your debt over multiple months/years.
- Avoid garnishments, levies, and liens on your other assets.
- Penalty fees will no longer accrue.
“It’s always best to be proactive about your tax situation and reach out to the IRS to discuss a resolution rather than let the situation go until you receive a notice of tax lien on your home or until an order of wage garnishment is sent to your employer’s payroll department,” says Brad Reichert, founder and managing director of Reichert Asset Management LLC. “The terms of IRS installment payments are oftentimes very flexible as far as the length of time you may choose to pay your tax debt, as long as you fully repay it within six years,” Reichert, a debt expert, explains.
3. Offer In Compromise
An Offer in Compromise (an OIC) allows you to settle your tax debt for less than what you currently owe. You can pay the IRS in monthly installments or lump sum. If you are facing financial hardship and can prove that you cannot pay your full tax debt, you may qualify for this program.
There are a number of factors that will affect whether you qualify for an OIC, such as your assets, expenses, and income. It should be noted that qualifying for this program is extremely difficult. Out of the 36,022 taxpayers that proposed offers in compromise in the fiscal year 2022, the IRS only accepted 13,165 settlement offers.
You should also know that applying for the program requires you to pay a non-refundable fee. You will also need to pay 20% of the total offer amount upfront when you send in your application.
4.Currently Not Collectible
Delinquent taxpayers who can no longer afford to pay tax debt may sometimes be able to get their bills deferred. It’s important to remember that this will not make your debt go away but will only delay collections until your situation improves.
This does come with a few downsides:
- Your debt will continue to accumulate penalties and interest.
- Your tax refunds in the future will be applied to your due tax bill.
- A lien may be filed against your property as a way for the IRS to ensure they will eventually receive payment.
5. IRS Forgiveness Program
While the IRS won’t forgive your entire debt, it’s possible to get some penalties and fees waived. Depending on the nature of the penalty, you may be able to get the following types of penalty relief:
- First Time Penalty Abatement (FTA) and Administrative Waiver
- Statutory Exception
- Reasonable Cause
Innocent spouse relief can also relieve you from paying taxes if your spouse made an error and understated taxes on your joint tax return.
6. Pay With a Credit Card
If you want peace of mind knowing that your tax debt is transferred from the IRS to a credit card issuer, you can use this payment method. By doing so, it may allow you more flexibility when it comes to dealing with this amount of money you owe over the long term. It is also important to keep in mind that credit card interest rates can be quite high, increasing your debt further.
7. Pay With HELOC
If you own a home and have equity, a home equity line of credit can be an option. You will have to ensure that you repay it on time to avoid losing your home.
8. Tap Into Your 401(k)
If you are under 59.5 years old, you can withdraw from your retirement account without having to pay the early withdrawal penalty. However, pulling money from your retirement account means you’ll be missing out on investment growth.
Before you withdraw from your 401(k), 403(b), IRA, or other long-term retirement account, make sure you have a plan to keep your retirement savings on track.
When To Look For Tax Debt Relief
If you have federal or state tax debt, it’s important to resolve it as soon as possible to avoid heavy penalties. Unpaid taxes can sometimes result in the revocation or denial of a passport to reduce the chances of a taxpayer potentially leaving the country to escape IRS tax collection.
If you are finding it difficult to cover your bills, you have received letters from the IRS about your debt, and have not filed your tax returns for more than one year, you should consider tax debt relief programs.
You should also consider debt relief programs if you owe overdue taxes. If you do, you should know that the IRS may have turned this matter over to a debt collector to collect on your tax debt, or may have instructed the US State Department to revoke, deny, or confiscate your passport.
How Your Credit Score Is Affected by Tax Debt Relief
Tax debt relief may sometimes affect your credit score, depending on the program you choose.
If you use a personal loan or a credit card to pay taxes, the transactions will be reflected in your credit scores. The reduction, however, will usually be slight, as the increase in your credit card utilization ratio is the primary factor that may influence the calculation of your score after your new balance is reported to your credit reports. However, your credit scores should rebound in a short amount of time if you keep up with your debt payments and pay down this debt.
Failure to pay your back taxes can lead to a federal tax lien on your home, which is most American taxpayers’ most valuable asset. This means that the IRS is entitled to recover unpaid taxes, interest, and penalties from the sale of your property. Although tax liens are no longer a part of credit reports since 2018, the negative collateral effects on your other credit accounts can still damage your credit.
If you decide to go with one of the installment payment options from the IRS, it’s important to note that they will not affect your credit scores because they are not considered to be loans or consumer debt, in general.
Rather, income tax installment payments are considered part of a private legal agreement between you and the U.S. Treasury (the government entity to which you will make your income tax payments).
Additionally, the IRS is restricted from sharing your personally identifiable information, so while a Notice of Federal Tax Lien may be discoverable by lenders via other means besides your credit reports, the details of the payment plan itself would not be.
Find a Reputed Tax Debt Relief Company To Work With
Many tax relief companies may offer to help you with your tax problems, but only a few can deliver. Seek out a reputed and trustworthy company to discuss your financial concerns. A professional can answer all of your questions and can offer you objective advice.