You’ve gathered all your documents. You’ve filled in all the blanks on your paperwork. You’ve finally filed your return. And unfortunately, after making it through the administrative nightmare of doing your taxes, you realize you owe the IRS money. If you don’t have the funds on hand, paying your tax debt might seem impossible. Now, before you start envisioning audits, bankruptcy, and liens, take a deep breath.
If you need to get out of tax debt, read on for a few good ways to settle up, as well as a few less than ideal options:
#1 Bite the Bullet
Writing the check for the entirety of your tax debt is by far the simplest, most efficient option. By putting down a lump sum, you’ll avoid incurring interest, and can get your finances back on track in a timely manner. However, for many people, the amount they owe is far more than what they can afford to pay out of pocket.
If this is the case for you, don’t worry—this first option is only for a lucky few.
#2 Hope for a Hall Pass
The technical term for getting off the hook in terms of tax debt is called an “Offer in Compromise.” This option may be available if you can prove that you can’t pay your tax debt without causing you extreme financial hardship.
In order for the IRS to accept your Offer in Compromise, you’ll need:
- Low monthly income.
- Very few, if any, assets.
- No pending investigations with the Department of Justice.
- All required tax documents on file, on time.
Keep in mind that even if you think you meet these requirements and you submit an application, there’s no guarantee you’ll be accepted.
#3 Stretch it Out
A practical, realistic way for many people to pay their tax debt is to enter into an installment agreement. This option allows you to pay off your debt over time, using monthly payments. If you make the agreed upon payments on time, the IRS (typically) won’t seize your property, assets, or wages.
There are two basic kinds of installment agreements:
- Short-Term – With a short-term agreement, you’ll have 120 days to complete your payments, and you won’t be subject to any application fees.
- Long-Term – With a long-term agreement, you’ll have more than 120 days to complete your payments, but some small fees will apply.
#4 Buy Time
Sometimes, stalling can help you get your finances in order. Thankfully, the IRS allows you to apply for a “currently not collectible” status. If your application is accepted, you’ll get a deferment period.
Be aware, your status will be re-evaluated on a yearly basis, and your debts will still accrue interest. Even so, knowing you have time to deal with your tax debt properly can help you sleep at night.
#5 Personal Loan
Now that you’ve weighed your options, you may be tempted to figure out how to make option #1 (Biting the Bullet) work, even if it means taking out a personal loan.
If you’re considering using a loan to pay tax debt, we strongly recommended you rethink it. Using a loan will make you subject to high interest rates, a lowered credit score, hidden fees, and credit limits.
Your other IRS options may seem scary, but they’re usually better in the long run.
Although filing for a Chapter 7 bankruptcy can effectively wipe out your tax debt, doing so comes with serious stipulations and disadvantages. Only debt that’s from income taxes is applicable to be forgiven, and you can’t erase a pending lien by filing. Bankruptcy is a serious financial decision, and not one you should turn to without exploring other options.
Remember, You Have Choices
You might not have a choice when it comes to paying taxes (hey, they’re inevitable!), but you do have choices in terms of how you pay off your tax debt.
Be sure to consider the big picture when you decide which route you want to go, and don’t make the decision lightly. While you need time to consider your decision, you also need to act quickly in order to avoid any further penalties.
Don’t worry, there’s a light at the end of every tax trouble tunnel!