If you owe the federal government a balance due on your income taxes, it is incredibly important for you to make good on the debt. Even if you do not have the lump sum of cash due, there are a few options you have to settle your debts with the IRS so it is imperative you do not neglect this obligation.
Avoiding an IRS tax debt is a sure fire way to get yourself in bigger trouble and larger debt. If you find you owe back taxes but are not sure what to do, consider one of the following options for your financial situation:
IRS Installment Agreement
An installment agreement is an agreement between you and the government where you agree to pay your debts in installments over a period of time. While there are penalties that will be assessed by the IRS, they agree not to pursue collection of the debt as long as you are paying on time. The installment agreement allows you to repay the debt on a monthly basis based on a reasonable amount you can afford. The IRS will have to approve the payment amount and the payment will be set up to be automatically be withdrawn from your bank account. You can use the installment agreement for as many years of back taxes as the IRS will allow which are decided on a case-by-case basis.
Partial Payment Installment Agreement
This kind of agreement is like the normal IRS installment agreement except the rules changes as the debt payments go on. Monthly payments are still made but at a certain point, the Statute of Collection will expire and part of your debt will be eliminated. Essentially people that utilize this method will settle their tax debts for less than what they owned.
Offer In Compromise
The offer in compromise involves settling your owed tax debts for pennies on the dollar but is not an option everyone can use. There are very strict criteria involved with being eligible for the offer in compromise according to IRS standards. The IRS must decide if settling the debt for less than owed will be done with an amount greater than they would otherwise be able to collect from you over time.
When you pay your taxes late or through an installment agreement, the IRS will continue adding fees and penalties to your total balance, making it higher each month. With penalty abatement, taxpayers can request the IRS forgive certain penalties being assessed to lower your balance. This method may be a good way to settle the debt for less than what is owed to clear the balance in full.
Innocent Spouse Relief
This option is only allowable for people that have filed their taxes jointly and need to seek relief from the joint responsibility of a tax debt from a specific year. The IRS must decide if the spouse is being unfairly held accountable for debts under a joint filing. The agency created this option as it does recognize there are legitimate times this relief may be deserved by an innocent spouse.
Bankruptcy can be a method of settling tax debts if you file for Chapter 7. Bankruptcy under Chapter 13 can be forgiven but this type of bankruptcy often requires individuals to pay tax debts in full via a payment plan rather than have the debts dismissed. Not everyone will qualify for a bankruptcy and the method should be utilized only as a last straw for financial help.