Paying taxes is never fun. Even when things go smoothly, it usually requires hours of paperwork. When things don’t go so smoothly, you could spend days or even weeks determining how much you owe. But what do you do when you’ve done all the paperwork and realize you can’t afford to pay your tax debt? Don’t despair. Here are 5 tips on settling a tax debt for an amount you can afford.
1. Set Up Installment Agreements
The due date for taxes is April 15th, or the first business day after if that day is not a business day. However, the IRS offers options to pay late if you don’t have the money on the day it is due. Entering into an installment agreement isn’t very difficult if you do so before the money is due. The IRS wants to get paid and will usually work with you, especially when you are acting in good faith.
Unfortunately, installment agreements come with a downside. Effectively, an installment agreement is a short-term loan — the IRS charges a small interest rate on any installment payments. Typically, the IRS will lower those rates during the first year to encourage you to pay the full amount before your next IRS bill is due.
2. Make an Offer in Compromise
While the IRS may seem overbearing and uncompromising, it has some sympathy for people who are facing financial hardship. If you are incapable of paying your debts and are unlikely to be able to pay them soon, the IRS may accept an offer in compromise. This means that you agree to pay a lesser amount than your full debt and the IRS agrees that amount will settle the debt you owe it.
While this may sound like a perfect way to pay off a debt, it isn’t available to everyone. First, you need to prove to the IRS that you are financially strapped and that you won’t be able to pay your debt in a reasonable amount of time. This typically means you need to provide the IRS with complete financial records of:
- Your income
- Your assets
- Current expenses
- Current debts
- Expected future income and debt.
This is not the solution for everyone. You are effectively offering to let the IRS audit you just by asking for an offer in compromise. If it finds any hidden assets, the IRS might not only refuse to settle your debts but also charge you with tax fraud.
3. Have Debt Recognized as Currently Not Collectible
If you are underwater financially, you can petition the IRS to recognize that your debt is currently not collectible. This is similar to requesting an offer in compromise except that you must be significantly deeper in debt. In an offer in compromise, you agree to pay a lesser amount than the full debt to discharge your debt. However, when your debt is deemed “currently not collectible,” the government acknowledges that you are unlikely to be able to pay any amount of your debt anytime soon.
The advantage of this situation is that the government will stop trying to collect your debt. Unfortunately, that isn’t the same as discharging your debt. It will continue to monitor your finances and if you later dig your way out of your financial hole, it will still be waiting to get paid. If your finances stabilize and you don’t inform the IRS so it can recover at least part of the money owed, you could be charged with tax evasion.
4. Use the Statute of Limitations
If you have suffered years of financial hardship, there may be a simple way to get the IRS off your case. It isn’t allowed to collect past debt more than 10 years after it was due. Typically, this means that you notified the IRS of your hardship and it determined your debt wasn’t currently collectible. If that continues to be true for long enough, the statute of limitations will have passed.
Typically, the IRS knows when the statute of limitations has passed for a debt and won’t bother you once it hits. But if for some reason you receive collection notices after that date, inform the IRS right away. It will have to confirm that the time limit has passed. Once it does, though, you should no longer get notices regarding that debt.
5. Hire a Tax Attorney
While it is possible to do any of the above on your own, it is easy to make mistakes that will put you in more hot water with the IRS. The best way to settle a tax debt for a reasonable amount of money is to hire an experienced tax lawyer.
It may seem counterintuitive to hire a lawyer when you can’t afford to pay your taxes, but tax attorneys make a living helping people get out of tax debt affordably. An experienced tax lawyer knows how to negotiate with the IRS and can minimize the cost of tax penalties. They can also determine a fair value that you can afford and help you collect the evidence you need to convince the IRS of that value.
While I can’t speak for other lawyers, typically, the amount of money I save for my clients is higher than the amount I charge in legal fees. If I am not saving you money on your tax debt, what value am I providing for you? If you have questions about how this works, someone in my office will answer all of them.
Contact Lewis Roberts, PA Today
Do you feel overwhelmed by tax debt? Are you worried that the IRS will place a lien on your property or garnish your wages? You shouldn’t face these kinds of repercussions just because you are suffering from financial hardship. I will fight to settle your debt for an amount you can afford. If you want to end the stress of tax debt once and for all, contact my law firm at (407) 749-0080 to learn more about your legal options.