Tips on How to Reduce Tax Debt

By: Alan Cleaver

Tax debt can be as disturbing as any other type of debt. Like any debt, reducing IRS debt can be done by following these simple methods.

Just like credit card debt, a tax debt to the IRS can be a major stress and be a long-lasting problem if it’s not taken care of properly.

The Internal Revenue Service (IRS) has gotten a bad reputation over the years because they can be agressive and unforgiving, even for the simple oversights. But keep in mind, if you make an attempt at payment, they tend to work with you.

The IRS will get actively involved in just about any delinquent tax case. The ones that have large balances or are way overdue will obviously get priority. Having an outstanding tax debt can cause you to be audited unexpectedly.

Generally, if your tax liability is $10,000 or less, you can work it out on your own with the IRS. When the amounts get higher though, it’s time to call in a professional tax consultant for help.

There are five (5) options for reducing tax debt.
  1. Installment Plan – This is straightforward and simple. You reach an agreement with the IRS to pay the debt on a monthly basis with a future target date for completion. Very easy and widely used today.
  2. Partial Payment Installment Plan – This is close to the installment plan above, except that there is an agreement that you will pay an amount that is less than you owe. This is where negotiation comes in and a professional tax debt negotiator can help. The debt will be reduced and payments will be on a monthly basis with a date for completion.
  3. Offer in Compromise – Closely related to a partial payment installment plan, an Offer in Compromise is an agreement for you to pay less than you owe the IRS. Usually, this involves a lump sum payment or a large down payment and substantial, short-term monthly payments.The IRS can refuse an offer in compromise. In addition, there are terms that include payment of the Offer in Compromise, file/pay taxes on time for the next 5 years, surrender tax credits, refunds and payments prior to the Offer in Compromise and surrendering tax refunds for the year in which you apply for the Offer in Compromise.An Offer in Compromise is similar to a negotiated settlement on credit card debt A tax debt professional can help you get the best settlement.
  4. Not Currently Collectible - A taxpayer can apply for “not currently collectible” status if they can show the IRS that they have no way of paying their liability.The IRS can agree not to collect the debt for a specified period of time. During this time, the IRS must stop all collection procedures including levies and garnishments. Additionally, the statute of limitations is in effect for this period.
  5. Bankruptcy – As a last ditch method, a chapter 7 or chapter 13 bankruptcy can eliminate your tax debt. This will have a lasting negative effect on your credit as a result and there are some tax debts that are not dischargeable under bankruptcy law.Tax liabilities must meet a certain criteria to be discharged in bankruptcy. These include:
    1. the return not being fraudulent
    2. the taxpayer not guilty of tax evasion
    3. that the age of the tax liability is at least three years old.

    There are also requirements on taxes being filed on time and paid prior to the liability becoming delinquent.

It is suggested that you seek the assistance of a tax professional to review the methods available to reduce your or eliminate IRS tax debt. They will help you:

  • Settle your debt with an offer in compromise
  • Eliminate all IRS penalties
  • Protect against IRS liens & seizures
  • Arrange reasonable payment plans