When you owe the IRS money, it will attempt to collect the money you owe. One of the most important steps you can take is to avoid legal collections processes.
If you owe back taxes, the IRS may put a lien against your property. This means that the IRS is the legal recipient of the funds if you choose to sell a car, sell your house, or if you liquidate any assets. The IRS can also issue a levy. An IRS levy allows the government to legally seize your property to pay a tax bill.
The goal of every tax debt relief program is to help you avoid legal action from the IRS, while making your tax debt more manageable. While it’s rare for all of your tax debt to be wiped out, there are tax debt relief options for most people.
If you're looking for professional tax debt relief help, check out Solvable here >>
What Are the Legitimate Forms of Tax Debt Relief?
While nothing in life is surer than death and taxes, there is truly tax debt relief. If you owe taxes that you cannot pay in full (using cash or assets on hand), you may be eligible for some form of tax relief. Here are the most common forms of tax relief offered by the IRS.
Extensions
If you owe money that you cannot easily pay right now, but the total amount is reasonable relative to your expected income, the IRS may offer an extension to you. This gives you more time to pay your taxes, but doesn’t result in a lower amount owed.
Installment Agreements
An installment agreement is an arrangement between the IRS and a taxpayer where a taxpayer pays back over a period of time, usually up to 72 months. Through an installment agreement, individuals agree to make a monthly payment to the IRS, often through a direct debit transaction.
To qualify for an installment agreement, you must owe $50,000 or less in back taxes as an individual or $25,000 or less in the current year for a business. The IRS estimates that 80% to 90% of all people who owe back taxes could qualify for this program.
Offer in Compromise (Tax Debt Relief)
An offer in compromise is the only way to reduce the actual amount you owe to the IRS. Under an offer in compromise, the IRS agrees to accept some amount less than the amount you owe in taxes. The IRS considers your income and assets before determining that it will accept a lower tax amount.
How to Pursue Tax Debt Relief
When you owe money to the IRS, it is important to move quickly to avoid having your property seized or your wages garnished. In most cases, the most important thing you can do is to file your taxes on time.
Once you file your taxes, be on the lookout for notifications from the IRS. Each letter will explain your options and how to avoid legal collection actions from the IRS. You can always call the IRS to speak with a collections agent. It is also possible to request an installment agreement online.
However, if your tax burden is too high, and you cannot pay it, you’ll need to pursue an offer in compromise. You cannot apply for an offer in compromise if you or your spouse is currently in bankruptcy. If you want, you can fill out an application for an offer in compromise on your own. But the DIY route may not be your best option. Working with a credible attorney could yield better results for you, but the results come with a price.
Should I Work With a Debt Relief Attorney?
If you’re struggling with back taxes, a consumer advocacy lawyer could be your best option. Consumer advocacy lawyers have experience helping people navigate the tricky issues surrounding IRS rules and procedures.
While lawyers can be expensive, it may be worthwhile to pay a lawyer to advocate on your behalf. Just be sure to interview a few lawyers to learn about their fees, their experience, and to be sure you mesh well with them.
Lawyers can help you understand the options available to you, and they can coach you through the tax relief process. Of course, you can do these things on your own, but the experience may be worthwhile for your peace of mind.
Will Tax Debt Relief Hurt My Credit?
Tax liens, which the IRS uses to increase payment compliance, go onto your credit report. When the lien goes onto your credit report, it has some negative impact on your credit score over 7 years (if you pay off the tax debt) or 10 years (if the tax debt goes unpaid).
While the tax lien will hurt your credit, the effect on your credit score will diminish over time. It is important to make timely payments on student loans, credit cards, car loans, and mortgages, and to pay down and eliminate debts to improve your credit score. In a few years, excellent credit behavior can help you to have good or even excellent credit again.
Final Thoughts
If you owe the IRS back taxes and are looking for help, it can be hard to know where to turn. There are many unscrupulous companies that prey on people who are struggling with tax debt because they know it can be scary.
If you're looking for assistance, check out Solvable and see if you can connect with reputable help.
Editor: Clint Proctor Reviewed by: Chris Muller
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.